Australia’s foreign trust rules
Abstract
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It is common for beneficiaries of wealthy families to migrate to Australia without any pre-migration planning. Subsequent direct or indirect payments, loans and even repayments from a foreign trust could be subject to full income tax in Australia, with throwback interest charges and without concessions in the hands of the Australian beneficiary. This applies even where the amounts are sourced from foreign income accumulated by a foreign trustee when the beneficiary was a foreign resident without any connection to Australia.
This article explores Australia’s foreign trust rules, the implications for the Australian beneficiary and considerations for foreign trustees, executors, foundations and family offices. The rules are broad and punitive, with little guidance and even fewer solutions for the beneficiary once Australia tax residency has been established.
Australia is often referred to as an appealing jurisdiction for the world’s wealthy individuals and families. One reason for this might be the perception (or maybe misconception) that there is no inheritance tax (IHT).
That said, although tax may not apply at the time of death, there is a claw-back of tax when the inheritor sells the asset as they also inherit the deceased’s tax cost base. Therefore, practically, it aligns the timing of the tax liability with the sale receipts but does not force the unnecessary disposition of wealth in order to pay taxes.
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