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Taxation consequences of a bequest from a NZ family trust

Newbie

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An Australian resident is a discretionary beneficiary of a NZ family trust set up in 1998. The NZ trust only owns the family home in NZ in which 3/4 of beneficiaries live, and a term deposit . The family home formed corpus of the trust and was paid down using the gifting provisions available in NZ and has increased in value by approximately two times the amount contributed as corpus. If a bequest is subsequently received from the trust by the Australian resident as a result of the death of one or both of the trustees, is this then assessable income of the Australian resident by operation of ITAA 1936 99B?   

 

But for the trust, the bequest would be received as a beneficiary of a deceased estate, which would be non-assessable non-exempt income. 

 

Is there an unintended tax consequence arising? 

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Most helpful response

Taxicorn Registered Tax Practitioner

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Trust income is taxable.

 

If they wanted the main residence concessions, they should not have had theproperty in a trust.

 

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Devotee

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Any ideas @Bruce4Tax?

Most helpful response

Taxicorn Registered Tax Practitioner

Replies 2

Trust income is taxable.

 

If they wanted the main residence concessions, they should not have had theproperty in a trust.

 

Newbie

Replies 1

Thanks, unfortunately agree with this. There is no CGT in NZ, hence there was no need to consider MR concessions - until now. The operation of 99B treats capital gains as assessable income without permitting CGT discount or offset of capital losses.  The reasons for the establishment of the NZ family trust did not contemplate (and why should it?) the potential tax consequences that would arise 20 years down the track as a result of having a non-resident beneficiary.  With the current structure, the ATO would get a windfall gain from what is to all intents and purposes a deceased estate.  The NZ beneficiary has no tax burden. The Australian beneficiary pays 46.5% tax. I am sure that there are many NZ family trusts with this issue that are only now beginning to play out - see Campbell v CoT.  Big 4 firms have already written to Treasury to suggest this provision should be redrafted so that it applies only to the mischief it was aimed at. 

Taxicorn Registered Tax Practitioner

Replies 0

Assuming there is discretion in the distribution, this matter could be handled by reaching an accomodation with the NZ beneficiaries to rearrange things so that cash is received directly from the estate or a NZ beneficiary instead of from the trust.