ATO’s growing focus on Section 99B sparks concern amongst tax professionals

This article was originally published by accountantsdaily (8 July 2025).

The ATO’s increasing focus on Section 99B taxes on foreign trust distributions has sparked concerns across the tax industry.

Lisa To, a taxation lawyer at Bartier Perry, told Accountants Daily that the ATO’s growing focus on Section 99B - a provision under the Income Tax Assessment Act 1936 that seeks to tax a broad range of foreign trust distributions received by Australian resident beneficiaries - has generated some concern amongst tax professionals.

“Historically, the application of this section has been relatively minimal, however recent focus on it by the ATO has sparked growing concerns in the industry as to the breadth of the section,” she said.

Due to the growing internationalisation of Australian wealth, the taxation of foreign trusts has become an area of heightened scrutiny for the tax office.

Under section 99B, ATO guidance has indicated that the burden falls on Australian tax professionals to determine the make-up of the foreign trust, in order to figure out the amount which should be subject to tax. The corpus of the trust - or the capital - is not taxable.

Tax expert John Jeffreys told Accountants Daily that figuring out the break-down of a foreign trust could be an incredibly challenging task for Australian tax practitioners.

“You have to ask the overseas jurisdiction - if they'll give it to you - the breakdown of where the money came from,” Jeffreys said.

“[Tax practitioners have] got to be able to get quite detailed information from the offshore jurisdiction, from whoever is accounting for that trust in the offshore jurisdiction. And that information might go back years. And so it's a very difficult thing.”

“What I would say to any accountant who's not used to dealing with this is that, particularly if it's a large amount of money involved, you need to get a specialist on it.”

Jeffreys also highlighted that many beneficiaries were not aware of section 99B, despite the fact that it could bring on large, unexpected tax bills.

“I have often referred to it as the scariest provision in the tax law, because you can get- depending on the amounts- large unexpected tax bills by both the accountant and the end beneficiary,” he said.

“The main problem is that people simply don't know that it exists, and if it affects you, it can be dramatic.”

Lisa To added that determining the breakdown of an offshore trust could be a difficult task, especially when they involved foreign jurisdictions that did not record the source of capital or income.

“A challenge for taxpayers is evidencing and tracing the amounts representing corpus since many overseas jurisdictions, for example, NZ [does] not have capital gains tax (CGT) and do not record the source of the capital or income in their financial statements,” she explained.

In order to meet the ATO’s compliance obligations, To said that beneficiaries must keep “significant and proper records to demonstrate eligibility for tax reductions under subsection 99B(2).”

“Proving the corpus reduction in section 99B(2)(a) favours the taxpayer usually requires strong contemporaneous evidence. Accountants should be aware of this burden, especially since section 99B is now appearing in ATO compliance activities,” she said.

While the ATO has demanded stronger contemporaneous evidence in regards to family trusts, she added that many groups did not keep adequate records.

“There is an increased trend by the ATO requiring a higher level of contemporaneous evidence and market rate valuations to support commercial and arm’s length dealing. For many private family groups and trusts, records may be lost or never documented,” To said.

Failure to adhere to proper record-keeping practices could bring on numerous consequences, she warned.

These could include tax audits, increased scrutiny on financial transactions including denial of deductions and increased assessable income, penalties and interest charges that are no longer deductible as of 1 July 2025.