Item 29 - Overseas transactions (Trust Returns)

Changes to the thin capitalisation rules to prevent double gearing structures

On 5 April 2019, legislation was enacted to improve the integrity of the income tax law by modifying the thin capitalisation rules to prevent double gearing structures. Double gearing structures involve the use of multiple layers of ‘flow-through’ entities (such as trusts and partnerships) to issue debt against the same underlying asset.

These changes apply to income years starting on or after 1 July 2018.

The changes will affect entities with interests in trusts (other than public trading trusts) and partnerships, as the threshold for the purposes of the associate entity debt, associate entity equity, and the associate entity excess amounts has been reduced from 50% to 10%.

Completing item 29

This is a mandatory question and must be answered. The default for this question is No.

If you answer Yes, you must complete a current year International dealings schedule.

International dealings schedule

Where the appropriate information is reported in the Trust tax return you must complete a current year International dealings schedule (NAT 73345) and lodged with the return via PLS.

Where the trust is a member of a consolidated group for the whole income year and derived foreign income the responsibility for preparing the schedule will rest on the head company of the consolidated group. Where a return is required because the trust had a period in the income year when it was not a member of a consolidated group (a non-membership period) the trust should complete a current year International dealings schedule where it has derived foreign income attributable to non-membership period.

The aggregate amount of the trust's transactions or dealings is the total amount of all dealings, whether on revenue or capital account (including property transfers or service provision), and includes the balance of any loans or borrowings outstanding with international related parties. Transactions must not be netted off against each other. Hence, a $600,000 purchase from a $700,000 sale to a related party should be treated as totalling $1,300,000 not $100,000.

International related parties are persons, including permanent establishments, who are parties to international dealings that can be subject to Division 13 of the ITAA 1936 or the business profits article or associated enterprises article of a relevant double tax agreement. The term includes the following:

• any overseas entity or person who participates directly or indirectly in the management, control or capital of the trust

• any overseas entity or person in respect of which the trust participated directly or indirectly in the management, control or capital

• any overseas entity or person in respect of which persons who participate directly or indirectly in its management, control or capital are the same persons who participate directly or indirectly in the management, control or capital of the trust

• a permanent establishment (PE) and its head office

• two permanent establishments of the same person.

'Participates' includes a right of participation, the exercise of which is contingent on an agreed event occurring. 'Person' has the meaning as in subsection 6 (1) of the ITAA 1936.

For more information as to the relevant degree of participation, refer to Taxation Ruling IT 2514 - Income tax: Company Schedule 25A: Information return for companies that transact business with related overseas entities.

The type of dealings or transactions which will require the trust to complete the International dealings schedule are its dealings with related parties as above, such as an overseas holding company, overseas subsidiary, overseas PE of the entity, or non-resident trust in which the entity has an interest. These dealings or transactions may be the provision or receipt of services, or transactions in which money or property has been sent out of Australia, or received in Australia from an overseas source during the income year. They may include the transfer of tangible or intangible property, provision or receipt of services, or the provision or receipt of loans or financial services.

If money or property is not actually sent out of Australia or received in Australia, but accounting entries are made that have the effect of money or property being transferred, this is also to be taken as an international transaction.

If the answer to this question is Y prepare and attach a current year International Dealings Schedule (ids) to the return. Refer to International dealings schedule (IDS).

Show at label D the amount of interest paid on money borrowed from overseas sources. Also include this amount at label I, item 5 Total interest expenses.

If you enter an amount at this label, you must prepare and attach an International Dealings Schedule (ids) to the return.

An amount of tax - withholding tax - is generally withheld from interest paid or payable to non-residents, and from interest derived by a resident through an overseas branch. You must remit these amounts to the ATO. You cannot claim a deduction unless you have remitted any withholding tax to the Commissioner.

If you have withheld amounts from payments to non-residents, you may need to lodge a PAYG withholding from interest, dividend and royalty payments paid to non-residents - annual report by 31 October 2019.

The amount at label D cannot exceed the Total interest expense at item 5, label I.

Money may be borrowed from overseas to:

• acquire income producing assets,

• finance business operations or

• meet current business expenses.

Show at label E the royalty expenses paid to non-residents during the income year.

If you enter an amount at this label, you must prepare and attach an International Dealings Schedule 2018(ids) to the return.

This amount is included in label J Total royalty expenses item 5 Expenses, plus or minus any reconciliation adjustment for royalty expenses that was included at label B Expense reconciliation adjustments item 5 Reconciliation items.

An amount of tax - withholding tax - is generally withheld from royalties paid or payable to non-residents and from royalties derived by a resident through an overseas branch. You must remit this amount to the ATO. The default rate in MYOB Tax is 30%. If the taxpayers royalties are from a country with which Australia has a double tax agreement, then the rate could be less than 30%.

If you have withheld amounts from payments to non-residents, you may need to lodge a PAYG withholding from interest, dividend and royalty payments paid to non-residents - annual report by 31 October 2019. You cannot claim a deduction unless you have remitted any withholding tax to the Commissioner. For more information 'phone the ATO investment and royalty withholding taxes helpline on 13 28 66.

Record keeping

Keep a record of the following:

• name and address of recipient(s)

• amounts paid

• nature of the benefit derived - for example, a copy of the royalty agreement

• details of tax withheld where applicable and the date on which it was remitted to the ATO.

This is a mandatory question and must be answered. The default for this question is No.

If the answer to this question is Yes, select Y from the list at label A and ensure that the details of the beneficiaries and the assessable amounts of net income to which each beneficiary - who is a non-resident at the end of the income year - is presently entitled are entered under Non-resident beneficiary additional information in labels J and K at the bottom of item 55 Statement of distribution. Do not include the non-resident beneficiary's share of the trust income which is subject to withholding tax, such as, withholding tax on interest, dividend and royalties.

If a beneficiary is a non-resident at the end of the income year and is presently entitled to a share of the income of the trust, the trustee is liable to tax on that share of the net income of the trust that is attributable to a period when the beneficiary was a resident, regardless of its source, and so much of the share of the net income that is attributable to a period where the beneficiary was a non-resident and is also attributable to Australian sources.

In the case of amounts covered by a withholding requirement, the trustee, at the time of distribution, deducts the tax payable and remits it to the ATO.

Attach a statement for each beneficiary who was a non-resident of Australia at any time during the income year, and who was presently entitled to income of the trust, showing:

• full details of any distribution to the beneficiary, including amounts of interest, royalties, franked dividends and unfranked dividends

• if a withholding amount has been paid and remitted to the ATO from the distribution, the amount of such distribution and the withholding amount paid

• name and residential address

• if any change occurred in the residency status of the beneficiary during the income year, details of when the beneficiary became or ceased to be a resident

• if from any distribution (other than interest, dividend or royalty income subject to non-resident withholding tax) made to the beneficiary, tax has been deducted and remitted to the ATO, the amount of the credit claimed for remittances made

• if the trust is a fixed trust and at least 90% of its assets, held either directly or indirectly, are not taxable Australian property

• if it is contended that all or part of the non-resident beneficiary's share of the income included income of the trust derived outside Australia and while the beneficiary was not a resident

• the beneficiary's share of that income

• the basis of the contention that the beneficiary is not a resident of Australia.

You must also provide evidence that:

• if no amounts have been transferred overseas, the beneficiary's share of income has been applied for the benefit of the beneficiary or otherwise dealt with on behalf of the beneficiary

• the beneficiary has been notified of the entitlement.

1. Did you directly or indirectly send to, or receive from, one of the countries specified, any funds or property - for example through another entity or country,

   OR

2. Do you have the ability or expectation to control, whether directly or indirectly, the disposition of any funds, property, assets or investments located in, or located elsewhere but controlled or managed from one of those countries?

Question 1.

This includes sending or receiving funds or property indirectly - for example, through another entity or country.

Question 2.

This includes:

• funds or assets that may be located elsewhere but are controlled or managed from one of the countries listed below, and

• where you have an expectation that you are able to control the disposition of the funds or assets, or you have the capacity to control the disposition indirectly - for example, through associates.

If this question applies, select Y for yes at the list at label C.

Valid specified countries are: