On 27 November 2024, the Australian Taxation Office (ATO) published Taxation Determination TD 2024/9. TD 2024/9 finalised the ATO’s guidance on section 99B of the Income Tax Assessment Act 1936 (ITAA 1936) and specifically on the relevant factors to be considered when applying paragraphs 99B(2)(a) and (b).

We previously wrote about TD 2024/9’s draft determination, TD 2024/D2 (Draft Determination), here. That article also provides the background leading to the insertion of section 99B, a refresher on the provisions and references to the Rolling Stones. Given the comprehensiveness of that article, the similarities between TD 2024/9 and the Draft Determination, and this author’s dearth of Rolling Stones knowledge, this article will provide a brief overview of section 99B and highlight the updates made in the finalised version of the determination, TD 2024/9.

Overview

TD 2024/9 focuses on the carve-outs in paragraphs 99B(2)(a) and (b) (see below).

So broadly, the paragraphs involve asking whether amounts would have been taxable if a hypothetical resident taxpayer derived the amounts. In both TD 2024/9 and the Draft Determination, the ATO calls these the “hypothetical resident taxpayer tests”. For the carve-outs in paragraphs 99B(2)(a) and (b) to apply, the amount needs to not be part of the hypothetical resident taxpayer’s assessable income.

What does section 99B catch?

In short, any amount, being property of a trust estate, which is paid to (or applied for the benefit of) a beneficiary, who is an Australian resident at any time during the income year, is included in assessable income pursuant to subsection 99B(1). However, section 99B will not apply where one of the following carve-outs under subsection 99B(2) applies:

an amount represents corpus of the trust, except to the extent to which it is attributable to amounts derived by the trust estate that, if they had been derived by “a taxpayer being a resident”, would have been included in the assessable income of that taxpayer (paragraph 99B(2)(a));
an amount that, if it had been derived by “a taxpayer being a resident”, would not have been included in the assessable income of that taxpayer (paragraph 99B(2)(b));
an amount included in the assessable income of the beneficiary under section 97;
an amount is in respect of which a trustee is assessed and liable to pay tax under sections 98, 99 or 99A;
an amount that is non-assessable non-exempt income of the beneficiary under section 802-17 (conduit foreign income); or
an amount included in the assessable income of a taxpayer under section 102AAZD (transferor trust rules).

The difficulty that this creates for taxpayers and their advisers is, once the elements of subsection 99B(1) are established, the taxpayer has the onus of establishing that one of the carve-outs in subsection 99B(2) applies in order to reduce (or eliminate) the amount included in assessable income under subsection 99B(1).

A sting in the tail is that the Australian beneficiary may also be liable to pay an interest charge on the amount assessable under subsection 99B(1) back to the time when the trustee derived the income representing the amount.

TD 2024/9 was accompanied by Practical Compliance Guideline PCG 2024/3 (PCG 2024/3). We will publish an article on PCG 2024/3 shortly.

Guidance on what ‘corpus’ refers to

One helpful change is TD 2024/9’s guidance on what ‘corpus’ refers to.

The Draft Determination merely provided that “[c]orpus refers to trust capital or the assets of the trust as distinct from trust income.”

Paragraphs 19 of TD 2024/9 replaced the above with the following guidance:

“Corpus, in the context in which it is used in section 99B and Division 6 more broadly refers to trust capital which is represented by the assets of the trust, excluding income which has not been accumulated. In determining whether an amount distributed represents corpus, for the purposes of paragraph 99B(2)(a), regard is had to the trust property distributed. The accounting records of the trust may assist in evidencing this but are not determinative of what the amount represents.”

Complementing paragraph 19, TD 2024/9 includes a new Example 4 to provide further guidance on the relevance of accounting treatment and the evidentiary requirement for corpus.

In Example 4, a non-resident trust owns land that has increased in value. The trustee reflected the unreleased increase in an asset revaluation reserve and then distributed funds from its cash reserves to an Australian resident beneficiary alongside advice and a copy of financial statements to show that the distribution is corpus and from the asset revaluation reserve. The ATO view in TD 2024/9 is that the asset revaluation reserve is not a separate asset and the fact that the trustee debited the asset revaluation reserve does not mean the distribution represents land and therefore corpus.

Accordingly, in the ATO’s view, whether section 99B applies will depend on what the cash reserves which funded the distribution are attributable to. The High Court in Fischer v Nemeske [2016] HCA 11 held, by majority, that a trustee can make an effective distribution of capital to beneficiaries from an asset revaluation reserve. However, the High Court did not need to consider whether the revaluation represented corpus. That is a question for another day.

Further, the ATO’s view in Example 4 raises a challenge which has not been grappled with by the Commissioner in either TD 2024/9 or PCG 2024/3. That is, there is no statutory test to determine the source of the relevant amount “paid” or “applied for the benefit of”. In fact, the ATO made it quite clear that it did not intend to grapple with evidencing the ultimate source of the distribution.

Characteristics of the hypothetical resident taxpayer

TD 2024/9 also updated its explanation on the characteristics of the hypothetical resident taxpayer to be considered in paragraphs 99B(2)(a) and (b). However, the only characteristic of the hypothetical taxpayer – that of a resident taxpayer – remains unchanged. TD 2024/9 states that “[n]o other characteristics can be assumed”.

Both the Draft Determination and TD 2024/9 noted that concessions such as the CGT discount are not taken into account because it is only available to specific classes of resident taxpayers. On top of this, TD 2024/9 also listed the small business concessions and the section 118-195 main residence exemption as concessions that are not taken into account.

Irrespective of the correctness of the ATO view, there is conflict in the way section 99B interacts with other provisions of the Income Tax Assessments Acts, and whether it can be said that conflict is consistent with the intention of Parliament in respect of provisions enacted since the enactment of section 99B in 1979. For example, did Parliament turn their mind to how the CGT discount would interact with section 99B when Parliament inserted the CGT discount provisions in 1999?

Circumstances giving rise to the amount

TD 2024/9 also removed the part of the Draft Determination under the sub-heading “Characteristics of the amount” and inserted guidance under “Circumstances giving rise to the amount”.

The ATO view in TD 2024/9 is that the focus for the purposes of the hypothetical resident taxpayer tests is the circumstances that gave rise to that amount, or how that amount was hypothetically derived. To support this, TD 2024/9 provided a more detailed analysis than in the Draft Determination of Howard v Commissioner of Taxation [2012] FCAFC 149, including setting out the facts and the Full Federal Court’s comments on the relevant provisions.

In Howard, a non-resident trust, the Esparto Trust, received distributions from another non-resident trust, the Juris Trust, and distributed those amounts to an Australian resident beneficiary. The relevant carve-out was paragraph 99B(2)(a) and it was accepted that the distributions were part of the corpus. The disputed issue was whether the hypothetical resident taxpayer test was passed where a distribution flowed through a chain of trusts. The Full Federal Court considered the circumstances that gave rise to each distribution, tracing through the chain of trusts to determine how each trust in the chain derived the relevant amount and the hypothetical application of the Australian taxation laws, including section 99B, on each distribution or amount derived.

In these specific circumstances, the key consideration was whether the amount derived by the Esparto Trust, which was sourced solely from amounts derived by the Juris Trust from proceeds of a share buy-back, would have been taxable to a hypothetical resident taxpayer.

After consideration of the off-market share buy-back provisions including section 44 and 159GZZZP of the ITAA 1936, the Full Federal Court held that, had a hypothetical resident taxpayer derived the amounts derived by Juris Trust (being the proceeds of the share buy-back), that hypothetical resident taxpayer would have included the amounts in its assessable income. Therefore, the distribution was not excluded by the corpus exception in paragraph 99B(2)(a).

Where a foreign trust becomes a resident trust

TD 2024/9 also added a new Example 7. Example 7 illustrates the application of section 99B where a non-resident trust becomes a resident trust in one year, and then proceeds to sell trust assets and distribute proceeds to an Australian beneficiary in the subsequent year. Notably, for the purposes of the hypothetical resident taxpayer tests, the ATO view is that it is the acquisition and disposal of the trust assets that is relevant: the change in the trust’s residence is not relevant. Section 99B therefore applies and the distribution is assessed under subsection 99B(1).

Conclusion

TD 2024/9 sets out the ATO’s views on paragraphs 99B(2)(a) and (b). Section 99B is, however, a controversial provision that many advisers say require updates at the legislative level.

For more information please contact:

Neil Brydges
Principal | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E: nbrydges@sladen.com.au

Kaitilin Lowdon
Principal Lawyer
M +61 402 859 214 | T+61 3 9611 0120
E: klowdon@sladen.com.au

Daniel Smedley
Principal | Accredited Specialist in Tax Law
M +61 411 319 327 | T +61 3 9611 0105
E: dsmedley@sladen.com.au

Rob Warnock
Principal Lawyer
T +61 3 9611 0155 | M +61 419 892 115
E: rwarnock@sladen.com.au

James Gao
Lawyer
T +61 3 9611 0166
E jgao@sladen.com.au