Disclaimer: The following is for informational purposes only. It is not intended to constitute legal advice, or to recommend a course of action, and does not create an attorney-client relationship between the reader and Renuka Somers, or Somers Tax Law, PLLC.

Care must be taken where a beneficiary, trustee and/or appointor of an Australian trust is a “U.S. Person” (a U.S. citizen or green card holder)[1] and/or a non-resident of Australia.

U.S. Tax Implications:

A U.S. Person is taxable in the U.S. on their worldwide income and assets, regardless of residency. This means that:

1. A U.S. Person who derives income from a foreign (Australian) trust, is taxable in the U.S. on that income.
2. A U.S. Person who is treated as the owner (“grantor”) of a foreign trust is taxable on the portion of income attributable to that ownership share, under the S. grantor trust rules in IRC sections 671-679.
3. The grantor trust ownership interest may also be subject to U.S. Federal (and State) Estate Tax on that U.S. Person’s passing.

Australian Tax Implications:

The structure of the Australian trust can determine the Australian tax outcome, for a nonresident beneficiary (NRB) (see ATO Taxation Determinations 2022/12 and 2022/13).

• If the Australian trust is not a “fixed trust” (i.e. the trust is an Australian discretionary/family trust), then the NRB is taxable in Australia on trust income and gains regardless of the source of that income/gain.
• If the Australian trust is a “fixed trust” (beneficiaries have fixed entitlements to all the income and capital of the trust), then the NRB is assessable in Australia only on gains from assets that are “Taxable Australian Property” (TAP) (i.e. direct or indirect interests in Australian real property).

Tax Planning:

Careful drafting and structuring of an Australia trust is required to achieve transnational tax efficiencies. Subject to consideration of an individual’s personal circumstances, this could include:

1. Weighing the Australian tax implications against the implications of triggering the U.S. grantor trust rules.
2. Direct bequests to NRBs of an Australian estate (note: IRS reporting obligations may apply).
3. Holding non-TAP assets in fixed trusts.
4. Streaming provisions with respect to different classes of beneficiaries (U.S. Persons vs. non-US Persons).
5. Avoiding default distributions.
6. Structuring the trust so that a U.S. Person does not have “grantor” status.
7. Removing U.S. persons from making decisions in relation to the trust or requiring joint decisions with a person who is an “adverse party”[2] under the U.S. grantor trust rules.

For existing Australian trusts with U.S. persons who are trustees/appointors/beneficiaries, the trustee and their advisors should consider what rights a U.S. Person may have with respect to trust income and capital as well as what role a U.S. Person may have in relation to the trust, and should obtain appropriate advice as to the U.S. and Australian tax implications. Changes to the structure of the trust, or a variation of certain trust provisions, may be required in some instances.

Endnotes

[1] IRC section 7701(a)(30) defines a “United States person” as (A) a citizen or resident of the United States, (B) a domestic partnership, (C) a domestic corporation, (D) any estate (other than a foreign estate) and (E) any trust if— (i) a court within the United States is able to exercise primary supervision over the administration of the trust, and (ii) one or more United States persons have the authority to control all substantial decisions of the trust.