ATO Interpretative Decision
ATO ID 2003/676
Income Tax
Capital gains tax: foreign source income made by a resident trustFOI status: may be released
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Note: This ATO ID contains a view in respect of section 98 of the Income Tax Assessment Act 1936 as it operated prior to amendments introduced by the Tax Law Amendment (2011 Measures No. 5) Act 2011 (including the introduction of Division 6E of Part III of the Income Tax Assessment Act 1936). Except in the case of some early balancing trusts and managed investment trusts, those amendments take effect from the 2010-11 and later income years.
This ATO ID has been amended to clarify legislative changes made by Tax Laws Amendment (2007 Measures No 3) Act 2007, and also Tax Laws Amendment (2006 Measures No 4) Act 2006 which is applicable to CGT events that happen on or after 12 December 2006. However these changes do not affect the decision in this interpretative decision.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is an Australian resident trustee assessable under subsection 98(4) of the Income Tax Assessment Act 1936 (ITAA 1936) on any resulting net capital gain on the vesting of the trust and registration of the trust assets, being shares in a foreign company, in the names of the non-resident beneficiaries?
Decision
No. The trustee is not assessable under subsection 98(4) of the ITAA 1936 because any resulting net capital gain is not attributable to sources in Australia.
Facts
An Australian resident trust (the Trust) was established before 20 September 1985 (pre-CGT) and vested on the death in late 2002 of an individual, a non-resident for taxation purposes. The trustee remained at all times an Australian resident for taxation purposes. The only assets of the Trust were post-CGT shares in a foreign company that is listed on foreign stock exchanges. The shares could only be physically sold via an overseas broker. The shares have increased in value and the trustee has an unrealised capital gain. The trustee currently holds the shares in a nominee capacity and proposes to transfer the shares to the non-resident beneficiaries in their individual names.
Upon the vesting of the Trust, the individual's two children, who are both non-residents for Australian taxation purposes, became presently entitled to 50% each of the trust estate's net income (including the net capital gain). There is no net income (including the net capital gain) to which no beneficiary is presently entitled.
Reasons for Decision
A resident trust, for CGT purposes, must include in the calculation of its net capital gain, capital gains and capital losses from CGT events happening to its worldwide assets. The net capital gain is then included in the net income of the trust in accordance with subsection 95(1) of the ITAA 1936.
Broadly, subsection 98(4) of the ITAA 1936 provides that the trustee of a trust may be assessed where there is an individual beneficiary who is a non-resident at the end of a year of income and that beneficiary is presently entitled to income of the trust. If the beneficiary has not been a resident of Australia at any time during the income year, the trustee is assessed on so much of the share of the net income of the trust estate as is attributable to sources in Australia.
As a consequence of the vesting of the trust on the death of the individual, the two non-resident beneficiaries became presently entitled to the net income of the trust.
The fundamental issue to be resolved is whether any capital gain made by the trustee in respect of the shares, is sourced in Australia.
The capital gains tax provisions do not contain any provision that expressly determines the source of a capital gain, or net capital gain, for the purposes of Division 6 of Part III of the ITAA 1936. The 'taxable Australia property' tests in section 855-15 of the Income Tax Assessment Act 1997 (ITAA 1997) are not relevant for this purpose.
In the absence of a statutory source rule for capital gains for the purposes of Division 6 of Part III of the ITAA 1936, reliance is appropriately placed on the common law source rules as they relate to income notwithstanding that net capital gains are a form of statutory income.
The leading Australian authority on the source of profits from the sale of shares is Australian Machinery and Investments Company Ltd v. Deputy Commissioner of Taxation (WA) (1946) 180 CLR 9; 3 AITR 359; (1946) 8 ATD 81 where it was held that where shares are situated outside Australia and sold outside Australia, the profit on sale is derived wholly from a source outside Australia.
Thus, where shares are sold using an offshore broker, the buying and selling is undertaken and thus sourced, where the contract is concluded.
Therefore, in applying the common law rules, the source of the capital gain made by the trustee will be outside Australia. This is because the shares in the foreign company are only traded on foreign stock exchanges and can only be bought and sold via an overseas broker and, as the company is trading overseas, from a practical viewpoint, the increase in the economic value of the shares would occur outside Australia.
Accordingly, as the source of the capital gain is outside Australia, the trustee is not assessable under subsection 98(4) of the ITAA 1936 on any resulting net capital gain from the vesting of the trust and registration of the shares in the names of the non-resident beneficiaries.
Year of income: Year ending 30 June 2003 Year ending 30 June 2004
Legislative References:
Income Tax Assessment Act 1936
subsection 95(1)
subsection 98(4)
section 855-15
Case References:
Australian Machinery & Investment Co Ltd v. Deputy Commissioner of Taxation
(1946) 180 CLR 9
(1946) 3 AITR 359
(1946) 8 ATD 81
Related Public Rulings (including Determinations)
Taxation Ruling IT 2680
ATO ID 2002/394
ATO ID 2002/903
ATO ID 2002/913
Keywords
Capital gains tax
Capital gains
Foreign income
Foreign source income
Non resident beneficiaries
Trusts
Discretionary trusts
Trustees
ISSN: 1445-2782