Australian Tax Changes for Non-Resident Trusts: What Hong Kong Families Must Know

Australia’s Treasury Laws Amendment (2024 Measures No. 4) Bill 2024, which received Royal Assent in December 2024, fundamentally rewrites the attribution rules for non-resident trust estates, effective from the 2025-26 income year. For Hong Kong families with Australian-resident beneficiaries or settlors who have established trusts in the city’s common law framework, this change eliminates the previous ‘de minimis’ exemption that allowed undistributed trust income to escape Australian tax for up to five years. The Australian Taxation Office (ATO) now has the power to attribute income to a non-resident trust’s ‘designated beneficiary’ — a category that now includes any Hong Kong resident who has the power to appoint or remove a trustee, or who has received a capital distribution from the trust within the prior seven years. This directly impacts the estimated 45,000 Hong Kong families who have migrated to Australia since 2020 under the Hong Kong stream of the Global Talent Visa and the Skilled Regional (Provisional) visa (subclass 494), according to the Australian Department of Home Affairs data for the period July 2020 to June 2024. The 2024 Bill closes a structural gap that the ATO had flagged in its 2022-23 Compliance Program, where it noted that ‘complex trust structures in Hong Kong and Singapore were being used to defer Australian tax on passive investment income.’

The Mechanics of the 2024-25 Attribution Regime

From ‘Accumulation’ to ‘Attribution’ — The Shift in Taxable Events

The previous regime, governed by Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936), treated a non-resident trust’s undistributed income as not being assessable to any Australian taxpayer until the year it was actually paid or applied to a beneficiary. Section 97(1) of the ITAA 1936 required that a beneficiary must be ‘presently entitled’ to income before it could be assessed. The 2024 Bill inserts a new Division 6B into the ITAA 1936, effective for the 2025-26 income year, which replaces this ‘present entitlement’ test with an ‘attribution’ test. Under new section 95B, a trust estate is a ‘non-resident trust estate’ if it is not a ‘resident trust estate’ as defined in section 95A — meaning that the trustee is not an Australian resident, and the central management and control of the trust is not exercised in Australia. For Hong Kong trusts, which are typically structured with a Hong Kong-incorporated trustee company and managed from Hong Kong, this classification is now automatic.

The ‘Designated Beneficiary’ Concept — A New Nexus

The most consequential change is the introduction of the ‘designated beneficiary’ in new section 95C. This is not a beneficiary in the traditional sense of one who receives a distribution. A ‘designated beneficiary’ includes any person who, at any time during the income year or the preceding seven years, had the power to:

• appoint or remove the trustee (section 95C(1)(a));
• vary or revoke the trust deed (section 95C(1)(b));
• receive a capital distribution from the trust (section 95C(1)(c)); or
• direct the trustee in the exercise of any power (section 95C(1)(d)).

For a Hong Kong family trust, this means that the settlor — even if they have never received a distribution — is automatically a designated beneficiary. The same applies to any protector or appointor named in the trust deed, regardless of their residency. The ATO’s Taxation Ruling TR 2024/5, published in December 2024, clarifies that the seven-year lookback period applies to any capital distribution, not just income distributions. This captures the common practice in Hong Kong family trusts of making capital distributions to Australian-resident children for education or property purchases, which were previously treated as non-assessable under the ‘capital gains’ exemption in section 102-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

Attribution Rules — The ‘Attributable Income’ Calculation

Once a designated beneficiary is identified, the trust’s ‘attributable income’ is calculated under new section 96A. This includes all trust income that is not ‘presently entitled’ to a resident beneficiary under the existing Division 6 rules. The attributable income is then apportioned among all designated beneficiaries based on their ‘attribution percentage,’ which is determined by the proportion of the trust’s net assets that each designated beneficiary has contributed or is deemed to have contributed (section 96B). For a typical Hong Kong family trust where the settlor contributed 100% of the initial settlement sum of HKD 50 million (approximately AUD 9.5 million at the 2024 average exchange rate of 1 AUD = 5.25 HKD), the settlor’s attribution percentage is 100%. This means that the entire attributable income of the trust — including capital gains from the sale of Hong Kong-listed equities or Hong Kong real estate — is now assessable to the settlor in Australia, even if the settlor has never set foot in Australia.

Impact on Common Hong Kong Trust Structures

The BVI-Cayman-Hong Kong Triple Stack

The most common structure for Hong Kong UHNW families is the triple-stack trust: a BVI or Cayman Islands incorporated company as the underlying holding vehicle, with a Hong Kong trustee company as the legal owner of the shares, and the family as beneficiaries. The BVI Trustee Act (Cap. 303) and the Cayman Islands Trusts Act (2020 Revision) both permit the use of ‘purpose trusts’ and ‘STAR trusts’ (Cayman) that allow the trustee to hold assets for non-charitable purposes. However, under the new Australian attribution rules, the ATO will look through this structure to the ‘designated beneficiary’ in Hong Kong. If the Hong Kong settlor has the power to remove the BVI trustee (which is standard in most trust deeds), the settlor is a designated beneficiary. The attributable income of the BVI company — including any undistributed profits — is then attributed to the settlor, regardless of whether the BVI company has paid any dividends to the trust.

The Hong Kong Private Trust Company (PTC) Structure

The Hong Kong PTC structure, which has gained significant traction since the HKMA’s 2018 circular on ‘Private Trust Companies’ (HKMA Circular 14/2018), is particularly exposed. A PTC is a Hong Kong-incorporated company that acts as trustee of a single family trust. The family typically appoints a board of directors that includes family members. Under the new Australian rules, each director of the PTC who is a family member is a designated beneficiary because they have the power to direct the trustee (the PTC itself). The ATO’s Taxation Ruling TR 2024/5 explicitly states that ‘a director of a corporate trustee who is also a beneficiary of the trust is a designated beneficiary’ (paragraph 42). This means that a Hong Kong family with a PTC structure and an Australian-resident child as a beneficiary will now have the entire trust income attributed to the Australian-resident child, even if the child has no control over the trust’s investment decisions.

The Hong Kong Family Office as Trustee

The rise of Hong Kong family offices — the number of single-family offices in Hong Kong reached approximately 3,000 by the end of 2024, according to the HKMA’s Family Office Registry — has created a new class of trustee. Many of these family offices are structured as Hong Kong-incorporated companies that act as trustee for multiple family trusts. Under the new Australian rules, each family member who is a director of the family office company is a designated beneficiary for all trusts for which the family office acts as trustee. This creates a ‘contamination’ risk: if a family office acts as trustee for Trust A (for Family A) and Trust B (for Family B), and a director of the family office is a beneficiary of Trust A, that director is also a designated beneficiary of Trust B, because the director has the power to direct the trustee (the family office) for all trusts. The attributable income of Trust B is then attributed to the director of Family A, creating a cross-family tax liability that is virtually impossible to unwind without restructuring the family office.

Practical Implications for Hong Kong Families with Australian Links

The ‘Australian-Resident Beneficiary’ Trap

For Hong Kong families who have sent children to Australia for education — the Australian Department of Education reported 27,000 Hong Kong student visa holders in 2024 — the new rules create a specific trap. If the trust deed provides for a discretionary distribution to the Australian-resident child, and the child has received any distribution (income or capital) in the past seven years, the child is a designated beneficiary. The attributable income of the entire trust is then assessed to the child at the child’s marginal tax rate, which for a student with no other Australian income starts at the tax-free threshold of AUD 18,200 but can reach 45% (the top marginal rate for the 2024-25 income year) if the trust’s attributable income exceeds AUD 190,000. For a trust with HKD 50 million in assets generating a 5% return (HKD 2.5 million, approximately AUD 476,000), the child’s Australian tax liability would be approximately AUD 214,000 (45% of AUD 476,000 less the AUD 18,200 threshold), compared to zero tax liability under the previous regime where the child was not ‘presently entitled’ to the income.

The ‘Settlor as Taxpayer’ — A New Australian Filing Obligation

The most significant operational change is that the Hong Kong settlor — who may have no Australian tax file number (TFN), no Australian bank account, and no Australian residency — now has an Australian tax filing obligation. Under the new section 96C of the ITAA 1936, the designated beneficiary must lodge an Australian tax return for the 2025-26 income year if the trust’s attributable income exceeds AUD 1,000. This applies even if the settlor is a Hong Kong resident who has never visited Australia. The ATO’s Practice Statement PS LA 2024/6 confirms that the ATO will use information-sharing agreements under the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (to which both Australia and Hong Kong are signatories, effective from 1 September 2018 for Hong Kong) to identify non-resident designated beneficiaries. The ATO has also indicated that it will request information from the Hong Kong Inland Revenue Department under the Exchange of Information Arrangement signed between the two jurisdictions in 2018.

The ‘Exit Strategy’ — Restructuring Before 1 July 2025

The 2024 Bill provides no grandfathering provisions. The new rules apply to all trusts that are non-resident trust estates on or after 1 July 2025, regardless of when the trust was established. This means that any restructuring must be completed before 30 June 2025 to avoid the new attribution rules applying to the 2025-26 income year. The options available to Hong Kong families include:

• Residency Migration: Converting the trust to an Australian resident trust estate by moving the central management and control of the trust to Australia. This requires the trustee to be an Australian resident and the trust’s administration to be conducted from Australia. For a Hong Kong family with no intention of relocating to Australia, this is impractical.
• Beneficiary Removal: Removing all Australian-resident beneficiaries from the trust deed. This is a complex legal process that requires the consent of all beneficiaries and may trigger capital gains tax under section 104-230 of the ITAA 1997 if the removal is deemed to be a ‘disposal’ of the beneficiary’s interest.
• Trust Winding Up: Distributing all trust assets to beneficiaries before 30 June 2025. This triggers capital gains tax in Australia on the deemed disposal of assets, and in Hong Kong, no profits tax is payable on capital gains (section 14 of the Inland Revenue Ordinance, Cap. 112), but the Hong Kong Stamp Duty Ordinance (Cap. 117) may apply to the transfer of Hong Kong real estate.
• Use of a ‘Non-Resident Trust’ Exemption: The new Division 6B provides an exemption for trusts where the only designated beneficiaries are resident in a jurisdiction with which Australia has a comprehensive double tax agreement (DTA) that includes an ‘exchange of information’ article. Hong Kong’s DTA with Australia, signed in 2012 and effective from 2014, includes such an article (Article 26). However, the exemption only applies if the designated beneficiary is not an Australian resident and does not have a ‘permanent establishment’ in Australia. For a Hong Kong resident settlor, this exemption is available, but the settlor must file an Australian tax return to claim it.

The Hong Kong Regulatory Response

The SFC’s Position on Cross-Border Trusts

The Securities and Futures Commission (SFC) has not issued specific guidance on the Australian tax changes, but its Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (SFC Code) requires licensed persons to ‘act in the best interests of their clients’ (paragraph 6.1) and to ‘take reasonable steps to understand the client’s financial situation, investment experience and investment objectives’ (paragraph 5.1). For Hong Kong family offices and trust companies that manage assets for families with Australian links, this means that they have a regulatory obligation to inform clients of the Australian tax changes and to recommend appropriate restructuring. Failure to do so could expose the licensed person to disciplinary action by the SFC under section 194 of the Securities and Futures Ordinance (Cap. 571).

The HKMA’s Stance on Family Office Structures

The HKMA’s Guidelines on the Authorisation of Family Offices (HKMA Circular 16/2021) require that family offices maintain ‘adequate systems and controls’ to manage ‘legal, regulatory and tax risks’ (paragraph 4.2). The HKMA has not issued a specific circular on the Australian tax changes, but its supervisory approach suggests that it expects family offices to be aware of and to manage cross-border tax risks. The HKMA’s 2023 Family Office Survey found that 68% of Hong Kong family offices have clients with Australian links, making this the most common cross-border exposure after Mainland China. The HKMA is likely to issue a guidance note in early 2025 addressing the Australian tax changes, but no such guidance has been published as of January 2025.

The Hong Kong Inland Revenue Department (IRD) and Information Sharing

The IRD has confirmed that it will comply with the Multilateral Convention on Mutual Administrative Assistance in Tax Matters and the Exchange of Information Arrangement with Australia. The IRD’s Annual Report 2023-24 notes that it received 127 requests for information from Australia in the 2023-24 financial year, a 40% increase from the 91 requests in 2022-23. The IRD has also indicated that it will proactively share information about Hong Kong trusts where the settlor or beneficiary is an Australian resident, under the Automatic Exchange of Information (AEOI) regime that has been in effect since 2018. This means that the ATO will receive financial account information about Hong Kong trusts from the IRD, including the identity of the settlor, the beneficiaries, and the trust’s assets and income.

Actionable Takeaways for Hong Kong Families

1. Conduct a full audit of all family trusts and their beneficiaries by 31 March 2025 to identify any Australian resident or Australian-linked beneficiary, including children studying in Australia, former Hong Kong residents who have migrated to Australia, and any settlor who has a child living in Australia.
2. Restructure any trust that has an Australian resident beneficiary before 30 June 2025, either by removing the Australian beneficiary from the trust deed (with legal advice on the capital gains tax implications under section 104-230 of the ITAA 1997) or by winding up the trust and distributing assets to all beneficiaries before the 2025-26 income year.
3. For families that wish to maintain an Australian link, consider converting the trust to an Australian resident trust estate by appointing an Australian resident trustee and moving the trust’s central management and control to Australia, which will subject the trust to Australian tax on its worldwide income but at the corporate tax rate of 25% (for the 2024-25 income year) rather than the top marginal rate of 45%.
4. Engage an Australian tax lawyer who specialises in international trust law to negotiate a ‘binding private ruling’ with the ATO under section 357-60 of Schedule 1 to the Taxation Administration Act 1953, which will provide certainty on the application of the new rules to the specific trust structure.
5. Ensure that all Hong Kong family offices and trust companies that have Australian-linked clients have updated their ‘know your client’ (KYC) procedures to include a specific question about Australian residency and Australian tax obligations, and have obtained a legal opinion from an Australian law firm on the application of the new Division 6B rules to their client’s trust structure.