Edited version of your written advice

Authorisation Number: 1012974946779

Date of advice: 23 February 2016

Ruling

Subject: Foreign trust distribution

Questions and Answers

Is part of the distribution of corpus from the non-resident family trust assessable income of the resident family trust under sections 99B of the Income Tax Assessment Act 1936, Section 97 of the Income Tax Assessment Act 1936, sections 6-5 of the Income Tax Assessment Act 1997 or 6-10 of the Income Tax Assessment Act 1997?

Yes

Did the distribution of the Corpus cause a CGT event to happen for the resident family trust?

No

This ruling applies for the following periods

Financial year ended 30 June 2014

Financial year ended 30 June 2015

The scheme commences on

1 July 2013

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

A non-resident discretionary trust was controlled by a non-resident family member.

The non-resident discretionary trust was wound up.

You are a resident trust whom received a share.

You did not pay for your interest in the foreign trust.

As part of the dissolution of the non-resident discretionary trust a transfer of shares was made to you as an eligible beneficiary.

You are not the sole beneficiary of the trust.

Your beneficiaries are not the same as the beneficiaries of the foreign trust. You are a member of a class of beneficiaries of the trust who is an object of a power of appointment vested in the trustee (i.e. a discretionary beneficiary).

Some of the shares held by the foreign trust were listed on the ASX, the remainder were listed foreign exchanges.

All Australian shares were transferred on the ASX.

The foreign shares couldn't to be transferred. They were sold and cash proceeds deposited into your bank account. The intention was that you would re-acquire these shares from the funds available in the Australian bank account within the same financial year.

Your records indicate that you did not re-purchase the same parcels of shares upon disposal. This was due to timing of cash being received in separate lumps sums and consequent market fluctuations during period of receipt and transfer. Accordingly, over the last X months the cash has been retained in the fund and/or used to acquire new Australian shares.

All family members both from Australia and abroad have contributed to the foreign trusts capital growth over time through jointly funding the acquisition of an investment property and share portfolio, and by loaning funds to the foreign trust.

The initial contributions of capital were to a foreign partnership of which the foreign trust was a partner. The initial capital contribution was funded by profits from a related entity "XYZ Family Trust".

You were not a partner in the fore, therefore not a partner with the foreign trust.

Your beneficiaries have received Foreign Source Dividend Income and Foreign Sourced Rental Income from the foreign trust in the past.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 95

Income Tax Assessment Act 1936 section 97

Income Tax Assessment Act 1936 section 98

Income Tax Assessment Act 1936 section 99

Income Tax Assessment Act 1936 section 99A

Income Tax Assessment Act 1936 subsection 99B(1)

Income Tax Assessment Act 1936 subsection 99B(2)

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1997 section 104-70

Income Tax Assessment Act 1997 subsection 104-85(5)

Income Tax Assessment Act 1997 subsection 104-85(6)

Reasons for decision

The assessable income of a resident taxpayer includes ordinary income and statutory income derived directly or indirectly from all sources, in or out of Australia, during the income year (subsection 6-5(2) and subsection 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997)).

Question 1

'Statutory income' is not ordinary income but is included in assessable income by a specific provision in the tax legislation (subsection 6-10(2) of the ITAA 1997). Section 10-5 of the ITAA 1997 lists those provisions. Included in that list is income derived pursuant to section 99B of the Income Tax Assessment Act 1936 (ITAA 1936).

Subsection 99B(1) of the ITAA 1936 provides that where, during a year of income, a beneficiary who was a resident at any time during the year is paid a distribution from a trust, or has an amount of trust property applied for their benefit, that amount is to be included in the assessable income of the beneficiary.

Subsection 99B(2) of the ITAA 1936 modifies the rule in subsection 99B(1) of the ITAA 1936 and has the effect that the amount to be included in assessable income under subsection 99B(1) is not to include any amount that represents either:-

• corpus of the trust, but an amount will not be taken to represent corpus to the extent that it is attributable to income derived by the trust which would have been subject to tax had it been derived by a resident taxpayer(paragraph 99B(2)(a) of the ITAA 1936)

• amounts that would not be included in assessable income of a resident taxpayer if they had been derived by that taxpayer(paragraph 99B(2)(b) of the ITAA 1936), or

• amounts that have been or will be included in the assessable income of the beneficiary under section 97 of the ITAA 1936 or have been liable to tax in the hands of the trustee under sections 98, 99 or 99A of the ITAA 1936 (paragraph 99(2)(c) of the ITAA 1936).

It is clear that none of the corpus distributed to you has been taxed in Australia.

Any part of the corpus distributed to you that is from accumulated foreign source income or gains that would have been assessable income of a resident taxpayer had it been derived by that resident taxpayer rather than the foreign trust will form part of your assessable income.

Question 2

Certain CGT events can occur when a trust distributes an amount of cash or property to a beneficiary. In your case the foreign trust disposed of shares

Section 104-85 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that capital gains tax (CGT) event E7 happens when a trustee of a trust (except a unit trust or a trust that is created from a deceased estate) disposes of a CGT asset of a trust to a beneficiary in satisfaction of the beneficiary's interest, or part of it, in the trust capital. The time of the event is when the disposal occurs.

The beneficiary makes a capital gain if the market value of the asset at the time of disposal is more than the cost base of the interest being satisfied (subsection 104-85(5) of the ITAA 1997). However, the capital gain is disregarded if the beneficiary acquired the CGT asset that is the interest for no expenditure (subsection 104-85(6) of the ITAA 1997).

Section 100-25 of the ITAA 1997 specifies that shares and foreign currency are CGT assets.

In your case, you received a parcel of shares and an amount of cash from a foreign trust which satisfied your interest in the trust capital. Therefore, CGT event E7 happened; however, any capital gain you made is disregarded as you did not pay to acquire your interest in the trust.

Section 104-70 of the ITAA 1997 provides that CGT event E4 happens if the trustee of a trust makes a payment to you in respect of your interest in a trust and some or all of the payment is not included in your assessable income.

CGT event E4 does not happen if a trustee of a discretionary trust makes a non-assessable payment to a mere object in respect of their interest in the trust. CGT event E4 does not happen because a mere object is not considered to have an interest in the trust of the nature or character required in paragraph 104-70(1)(a).

Reference Para.3 TD 2003/28

The meaning to be given to the words 'interest in the trust' depends on the context in which they are used, see the example Leedale v. Lewis [1982] 3 All ER 808 and Gartside v IRC [1968] AC 553. In its context in section 104-70, the interest in the trust is one that is akin to the interest that a unit holder has in a unit trust. The interest that is contemplated is one in which a taxpayer invests.

The interest that a mere object has in a trust is not one in which another person can invest - such an interest, being a bare right of action, cannot be purchased or assigned. Therefore as a discretionary beneficiary, you do not have an interest subject to CGT event E4.

Consequently, the shares and the deposited cash amounts you received are not assessable under the capital gains tax provisions.

However, in regard to any foreign currency, either a forex event or a CGT event will happen if any changes occur either through conversion to another currency or a change in account the foreign currency is held or invested in.

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