Edited version of your written advice

Authorisation Number: 1051259263234

Date of advice: 4 September 2017

Ruling

Subject: Foreign resident beneficiaries

Question 1

Is the Estate a fixed trust?

Answer:

Yes.

Question 2

Are the non-resident remainder beneficiaries presently entitled to capital gains after the death of life tenant?

Answer:

Yes.

Question 3

Can a capital gain that the foreign resident remainder beneficiary is presently entitled to be disregarded if the gain is not on taxable Australian property?

Answer:

Yes.

This ruling applies for the following period:

Year ended 30 June 2017

The scheme commenced on:

1 July 2016

Relevant facts and circumstances

The deceased passed away prior to 20 September 1985, leaving relative X as the life tenant in their Estate.

In the Will relatives Y and Z and an educational institution were nominated as residuary beneficiaries upon the death of relative X.

Relatives Y and Z are each entitled to two sevenths of the Estate.

Both Y and Z have always lived overseas and are consequently non-residents for Australian taxation purposes. Neither of them have ever been Australian citizens.

The life tenant X passed away during the year ended 30 June 2017 leaving Y and Z each presently entitled to 2/7ths of the income and corpus of the residual Estate.

In the 2017 financial year Y and Z may be each presently entitled to a net capital gain on non-taxable Australian real property.

The assets of the Estate consist of equities listed on the Australian stock exchange. Some assets have been acquired after 20 September 1985.

You have provided the details of the assets of the Estate.

The Trust Deed lists information such as:

● An Australian company is sole Executor and Trustee.

● Pecuniary legacies (fixed amounts) bequeathed to named beneficiaries.

● Identified specific items bequeathed to named beneficiaries.

● Specific bequests to named beneficiaries.

● The rest of the household furniture and effects to be divided approximately equally amongst four named beneficiaries. Instructions included that the items are not to be sold but given to others. The four named beneficiaries to agree on the distribution as far as possible in accordance with a list kept in a Deed Box. One of the named four is to have final say in the event of disagreement.

● A named beneficiary given occupation free of charge of specifically identified flat for one year. After that, or if the beneficiary left before or tried to sublet etc, the flat reverts back to part of the residuary estate.

● Rest and residue both real and personal goes to the Trustee upon trust to pay debts, duties and taxes. The remaining residuary estate divided and the Trustee shall hold upon the following trusts:-

1) One share upon trust to pay the income therefrom to one named beneficiary during their lifetime and upon their death for an educational institution for the promotion and furtherance of education.

2) One share upon trust to pay the income therefrom to another named beneficiary during their lifetime and upon their death to divide the same into three equal parts to three named individual beneficiaries for their own use absolutely.

3) One share less a nominated sum upon trust to pay the income therefrom to another named beneficiary during their lifetime and upon their death to divide the same into equal parts to two named individual beneficiaries and the institution for promotion and furtherance of education.

4) One share less a nominated sum to pay the income therefrom to a named individual beneficiary during their lifetime and upon their death to divide the same into parts as per (3) above.

● If any trusts fail then that interest is to be divided proportionately amongst the others.

● Additional powers conferred upon the Trustee:

● Absolute and uncontrolled discretion to postpone the sale calling in and conversation of the estate – no responsibility for any loss during this time.

● Absolute powers to repair, improve, alter, demolish or rebuild any real estate forming part of the estate.

● To invest any moneys forming part of the estate: fully paid shares or debentures from the ASE, a foreign country stock exchange or any of the foreign country’s dominions or any foreign countries except mining companies and such investments to be as far as possible of the same type as are held by the deceased at the date of death.

● Deposit in any bank or banking company in Australia, a named foreign country or any of the foreign country’s dominions or any foreign countries.

● To purchase real estate in any part of the world other than vacant land.

● To purchase shares of any kind in any limited liability company in which the deceased is holding shares at the date of death.

● To take out mortgages on any part of the estate as for the purposes of administering the estate.

● To exercise all rights and privileges and perform all duties appertaining to any shares or stock. In particular be at liberty to assent to any arrangements modifying such rights privileges or duties and to agree to any scheme or arrangement for reconstruction of the increase or reduction of the value or amount of such shares or stock etc in connection with such shares or stock.

● For any infant beneficiaries, the Trustee has absolute discretion to pay or apply the whole or any part of their share for the maintenance benefit education or advancement of such and to pay the guardian with whom the infant is living. The Trustee will not be bound to see to the application of such moneys.

● The trustee can employ any solicitor, accountant or other agent to transact all or any business required to be done in connection with the estate.

Relevant legislative provisions

Income Tax Assessment Act 1936 Schedule 2F

Income Tax Assessment Act 1936 Section 272-5

Income Tax Assessment Act 1936 Subsection 272-5(1)

Income Tax Assessment Act 1936 Section 272-65

Income Tax Assessment Act 1997 Section 104-75

Income Tax Assessment Act 1997 Subsection 855-10(1)

Income Tax Assessment Act 1997 Section 855-20

Income Tax Assessment Act 1997 Section 855-40

Income Tax Assessment Act 1997 Subsection 855-40(2)

Income Tax Assessment Act 1997 Subsection 855-40(3)

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

Fixed Trust

The trust instrument, for the purpose of subsection 272-5(1) of Schedule 2F of the Income tax Assessment Act 1936 (ITAA 1936), consists of the testamentary trust created under the Will of the deceased.

A fixed trust is defined in subsection 995-1(1) of the Income tax Assessment Act 1997 (ITAA 1997), providing that a trust is a fixed trust if entities have fixed entitlements to all of the income and capital of the trust.

The term 'fixed entitlement' is then defined in subsection 272-5(1) of Schedule 2F of the ITAA 1936. A fixed entitlement in a trust is where a beneficiary has a vested and indefeasible interest in the income or capital of the trust.

To determine if the foreign beneficiaries have a fixed entitlement, it must be determined if they have a 'vested and indefeasible interest’. This term is not defined in tax legislation. The ordinary meaning can therefore be applied.

Paragraphs 13.3 to 13.9 of the Explanatory Memorandum to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 reflects what this meaning may be. A 'vested interest’ means an individual has a present right to something, and 'vested indefeasible interest’ means that right cannot be lost.

The testamentary trust provides a vested interest for both non-resident beneficiaries in receiving the residuary estate of the deceased's estate.

There is no clause within the will that would authorise the Trustee to cause the beneficiaries' entitlement to be defeased.

Since the parties bequeathed within the will have a vested and indefeasible interest in a share of the residuary estate, they have fixed entitlements in accordance with subsection 272-5(1) of Schedule 2F of the ITAA 1936.

Therefore, the testamentary trust founded by the will of the deceased is a fixed trust under section 272-65 of Schedule 2F of the ITAA 1936.

CGT event E5

Section 104-75 of the ITAA 1997 provides that a CGT event E5 occurs if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which division 128 applies, such as a deceased estate) against the trustee, disregarding any legal disabilities the beneficiary may be under.

The non-resident beneficiaries became absolutely entitled to the residual assets of the testamentary trust upon the passing of the life tenant. Therefore, CGT event E5 has occurred.

Division 855 of the ITAA 1997

Under section 855-40 of the ITAA 1997 a CGT exemption is available where a capital gain or loss is made by a foreign resident on an interest in a fixed trust and that interest is not taxable Australian property.

Specifically, subsection 855-40(2) of the ITAA 1997 provides that a capital gain you make in respect of your interest in a fixed trust is disregarded if:

● you are a foreign resident when you make the gain;

● the gain is attributable to a CGT event happening to a CGT asset of a trust (the CGT event trust) that is the fixed trust; and

● the asset is not taxable Australian property for the CGT event trust at the time of the CGT event.

In this case, the beneficiaries are foreign residents and the gain has occurred from an E5 CGT event.

Section 855-20 of the ITAA 1997 defines taxable Australian real property as being:

(a) real property situated in Australia (including a lease of land, if the land is situated in Australia); or

(b) a mining, quarrying or prospecting right (to the extent that the right is not

real property), if the minerals, petroleum or quarry materials are situated in Australia.

In this case, the assets subject to the CGT event E5 are listed Australian securities and are therefore not taxable Australian property.

All requirements of subsection 855-40(2) of the ITAA 1997 have been met therefore the capital gain of the non-resident beneficiaries can be disregarded.

Further, subsection 855-40(3) of the ITAA 1997 provides that as a trustee of a trust you are not liable where the capital gain has been disregarded for the beneficiary under subsection 855-40(2) of the ITAA 1997.

Accordingly, the trustee is not liable for any CGT arising from CGT event E5 occurring.

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