Frizelle and Commissioner of Taxation – section 99B in action

In Frizelle and Commissioner of Taxation [2026] ARTA 752, the Administrative Review Tribunal (Tribunal) considered whether distributions received by an Australian resident beneficiary from a chain of non-resident discretionary trusts were assessable under section 99B of the Income Tax Assessment Act 1936 (Cth).

The Tribunal’s reasons provide helpful guidance on the corpus exemption in paragraph 99B(2)(a), the hypothetical resident taxpayer test, and the tracing of distributions through multiple layers of offshore trusts.

Frizelle also highlights that when challenging amended assessments (for section 99B amounts or otherwise), taxpayers bear the burden not only of disproving the Commissioner’s position, but also of positively establishing the factual and evidentiary basis for any claimed exemption.

Section 99B, the corpus exemption and the hypothetical resident taxpayer test

Broadly, section 99B provides that 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 to that amount to the extent one or more of the exemptions or carve-outs under subsection 99B(2) applies.

One such exemption is paragraph 99B(2)(a), which carves out amounts representing corpus of the trust estate from being included in assessable income under 99B, 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. Put simply, there is a corpus exemption that removes amounts from being taxable under section 99B and an exception to the exemption that removes amounts from being exempt under the corpus exemption. The exception to the exemption is the ‘hypothetical resident taxpayer test’.

Facts

Ms Megan Frizelle (Applicant) became an Australian resident in the 2016 income year. Prior to 2016, a series of non-resident discretionary trusts had been established in the Island of Jersey and Island of Guernsey for the benefit of the Applicant and her parents.

The relevant trusts involved were:

Trust name	Beneficiaries (in the relevant years)
Plet Trust	The REG Trust
REG Trust	The Megan Trust and the Applicant’s mother
Megan Trust	The Applicant, her husband, and her mother.

The Commissioner identified the following distributions flowing through those trusts to the Applicant during the 2019 and 2020 income years.

Distribution	Date	Amount
Distribution One	14 June 2019	GBP 78,845.70
Distribution Two	24 October 2019	GBP 58,229.81
Distribution Three	30 April 2020	AUD 20,000

Following an audit, the Commissioner issued amended assessments treating the amounts as assessable under subsection 99B(1), with interest under section 102AAM, together with shortfall interest and administrative penalties for recklessness. The Applicant objected on the basis that the amounts represented corpus and therefore fell within the corpus exemption in paragraph 99B(2)(a). The Commissioner disallowed the objection and the Applicant applied to the Tribunal.

At the Tribunal, the Commissioner conceded on:

• half of Distribution One; and

• the whole of Distribution Three.

The Commissioner did not explain why these amounts were conceded.

The Tribunal therefore focused on:

• GBP 39,422.85 (being half of Distribution One); and

• GBP 58,229.81 (Distribution Two).

Applying subsection 99B(1) and section 99C to the distributions

As stated above, subsection 99B(1) brings 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, into the beneficiary’s assessable income.

Section 99C contains deeming rules that are designed to ensure a beneficiary cannot escape the operation of section 99B where indirect or artificial means are used to provide the beneficiary with the benefit of accumulated trust income.

For Distribution One, the Tribunal found that half of Distribution One had been applied for the Applicant’s benefit through a loan repayment arrangement connected with the purchase of the Applicant’s home. The REG Trust had previously advanced a loan to the Applicant and her husband. Accounting records showed that the Megan Trust distributed funds that were applied to settle part of that loan. The Tribunal held that this constituted an amount “applied for the benefit” of the Applicant within subsection 99B(1), despite that the funds were not paid directly to her.

For Distribution Two, the trustee transferred the funds to the Applicant’s mother’s bank account before the mother ultimately transferred them to the Applicant. The Applicant contended the amount was a gift from her mother and the Tribunal rejected that characterisation. The evidence demonstrated that the funds originated from the trust structure and the Applicant ultimately received them. The Tribunal again concluded that the amount had been applied for the Applicant’s benefit for the purposes of subsection 99B(1).

Corpus exemption and the evidentiary issue

The Tribunal reiterated that, under section 14ZZK of the Taxation Administration Act 1953 (Cth), taxpayers bear the burden of proving both that an assessment is excessive and what the correct assessment should have been.

The Tribunal emphasised that merely asserting that a distribution represents “capital” or “corpus” is insufficient. The taxpayer bears the burden of objectively proving the source and character of the amounts distributed. Accordingly, the Applicant bore the burden to establish that the corpus exemption applies and that the hypothetical resident taxpayer test should be answered negatively.

Importantly, the Tribunal gave little or no weight to:

• unsigned witness statements;

• late-filed trustee correspondence;

• unsupported assertions that distributions were “capital”; and

• a letter signed by the Applicant’s mother that had been drafted by the Applicant’s husband and edited by the Applicant’s accountant.

The Tribunal also noted that key witnesses were not made available for cross-examination.

The evidence accepted by the Tribunal included trust instruments, financial statements, journal entries, bank account records, and the loan agreement between the REG Trust and the Applicant and her husband.

Here, the Tribunal noted that the Applicant provided no evidence of the source of the distributions (in the hands of the REG Trust or the Plet Trust) and therefore had not proved that the hypothetical resident taxpayer test should be answered negatively and the corpus exemption should apply.

Section 102AAM interest, shortfall interest, and penalties

The Tribunal also held that:

• the Applicant did not discharge her burden of proof to decrease section 102AAM interest;

• the Applicant did not establish that shortfall interest should be remitted; and

• the Applicant did not discharge her burden of proving her penalty assessments were excessive.

The Tribunal considered it relevant that, the Applicant:

• did not disclose the foreign trust distributions;

• provided inconsistent explanations during the audit; and

• did not keep adequate records substantiating her position.

However, the penalties and interest required recalculation to reflect the Commissioner’s concessions that were excluded from assessable income.

Takeaways

Although Frizelle was ultimately decided in the Commissioner’s favour due to the Applicant failing to discharge her burden of proof, as Frizelle is the first section 99B case since Campbell v Commissioner of Taxation [2019] AATA 2043, the Tribunal’s analysis and comments are helpful for taxpayers and advisers. The following points from Frizelle are also instructive:

• The Tribunal noted that the provisions of section 99B “can only be understood in their historical context” and briefly discussed Union Fidelity Trustee Co of Australia Ltd v Commissioner of Taxation [1969] HCA 36 and the explanatory memorandum for the act introducing section 99B.

• The Tribunal observed that the taxpayer’s knowledge of the trust structure or distributions was irrelevant to the operation of section 99B.

• As there was a chain of non-resident trusts, the Tribunal followed Howard v Commissioner of Taxation [2012] FCAFC 149 in undertaking analysis through each layer of the trust structure. The hypothetical resident taxpayer test therefore applies repeatedly as distributions are traced through the chain.

Sladen Legal regularly assists clients with taxation of trust issues. If you have any questions or would like any assistance, 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

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

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

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