When Trusts Follow You (or not) to Australia

When individuals move to Australia, trusts in which they are trustees or which they control may become tax residents of Australia. A trust can be resident of Australia when either one of the trustees is a tax resident of Australia or when central management and control of the trust is in Australia. It can be very difficult to unwind the significant tax implications associated with a foreign trust unexpectedly becoming an Australian resident. 

Where a trust becomes a tax resident of Australia, it must register for a tax file number and lodge tax returns. If another country has primary taxing rights, the income and capital gains must still be disclosed in the Australian tax return. The trust may be eligible for a foreign income tax offset with respect to taxes paid overseas.

Depending on the amounts taxed offshore, an Australian resident trust may have to pay additional tax in Australia where the offshore rate of income tax is less than the Australian tax rate. On the other hand, if Australia has primary taxing rights, the trustee on behalf of the trust may be required to pay taxes in Australia and claim a credit overseas, where available.

When an individual moves to Australia and the family trust remains a foreign resident, the trust can become an Australian resident trust by appointing an Australian company or Australian resident individuals as trustees. In such instances, the trust deed must be reviewed and amended to ensure the operation of the trust is in compliance with Australian trust deed requirements.  

Capital assets other than those that are Australian taxable property and those that were acquired prior to 20 September 1985 may be eligible for an uplift in value when the trust becomes an Australian resident. However, the interaction of other provisions in the income tax legislation may prevent the trust assets from benefiting from this uplift.  

A trust becoming an Australian resident trust may be the preferable outcome, especially where the trust can obtain an uplift in the cost base of its assets. If a trust continues to be a foreign trust, any distributions that are made to the Australian beneficiary must be included in the beneficiary’s assessable income. In many situations, the income of a foreign trust can be attributable to the Australian beneficiary, even when the income is not actually distributed by the trustee. Any amount, being property of a trust estate, that is paid to, or applied for the benefit of a beneficiary who is an Australian resident, must be included in the beneficiary’s assessable income. Such amounts can be reduced by certain items, such as corpus, but these exceptions are very limited. In many cases, beneficiaries are taxed on the full proceeds paid to them or applied for their benefit, without any reduction.  

Thus, to ensure that there are no unexpected  tax outcomes, it is important to obtain advice prior to moving to Australia.