What tax do I have to pay on income from my family trust in Australia?
Question:
I recently immigrated to Israel from Australia. My father has set up a family trust in Australia, of which I am one of the beneficiaries. I have heard that Israel now wants to tax offshore trusts. What is my situation in this regard?
Australian Oleh
Sent (September 1, 2007)
Answer:
By: ACL
Dear Australian Oleh:
The concept of the family trust you mention is very common in Australia, and is favorably treated by the Australian Tax Authorities.
In the recent Israeli Tax reforms, an attempt was made to introduce the taxation of offshore trusts. In this regard, from 2003, under certain circumstances, a beneficiary of a trust has to declare the existence of the trust to the Israeli Tax authorities. During 2003, a proposed law was tabled, effective from January 2006, which would aim to make trusts of Israeli residents taxable.
The proposals listed certain qualifications which would exempt the trust from Israeli taxation. One exemption is if the trust was established by a non-Israeli resident. In your case, since the family trust was established by your father who lives in Australia, the proposals would not have applied to this trust.
An area of concern, which I would like to point out at this stage, is that many Australian family trusts pay out interest, rather than distributions of the income. This interest would be taxable in Israel if the recipient is an Israeli resident, and it is not paid to the recipient benificiary, but left as an oleh loan account. A possible ramification could be that the Israeli resident be deemed as funding the trust, hence categorized as a "settlor" of the trust, which could deem the trust to be non taxable in Israel. The situation would need to be assessed by an international tax expert, as there may be legal ways of restructuring the trust to minimize the tax liability resulting from this payment of interest.
Finally, it would be advisable for your father’s will to be assessed, to determine the Israeli tax liability on the inheritance and the subsequent income earned by that inheritance. A simple mechanism could be employed, resulting in future tax savings, which would be to your direct benefit.