Edited version of private advice

Authorisation Number: 1051724662750

Date of advice: 18 March 2021

Ruling

Subject: Trust residency and CGT

Question 1

Is A Limited a resident of Australia for taxation purposes?

Answer

Yes

Question 2

Is A Trust a resident trust of Australia for taxation purposes?

Answer

Yes

Question 3

Is the capital gain made from disposal of foreign properties assessable in accordance with subdivision 115-C of the Income Tax Assessment Act 1997 (ITAA 1997) if individual A and B is made 'specifically entitled' the gain?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2018

Year ended 30 June 2019

Year ended 30 June 2020

The scheme commences on:

1 July 2017

Relevant facts and circumstances

The A Trust (Trust) is a discretionary trust.

The Trust was established in country N.

The appointors of the Trust are individual A and B who are Discretionary Beneficiaries of the Trust.

The current trustee for the Trust is a country N incorporated limited company, A Limited (Trustee).

The Trustee's reporting and accounting obligations in country N are managed by a firm.

The directors of the Trustees are individual A and B.

The Trustee has 100 ordinary shares on issue which are equally held by two individuals who live in Australia.

Two individuals are residents of Australia for taxation purposes.

The Trust is also a tax resident of country N.

The Trust invests in real properties in country N.

The Trust Deed empowers the trustee to make beneficiaries specifically entitled to income and capital gains. Individual A and B are the beneficiaries that have been made presently entitled to the capital gains made by the trust estate.

The Trust Deed provides unfettered discretion to the Trustee as to the exercise of the powers and discretions conferred upon by the deed.

Individual A and B control the Trustee and Trust and make all relevant decisions in relation to the administration of and any investments made by the Trustee and Trust. These decisions have been and continue to be made by them in Australia.

Individual A and B have no family or relatives in country N and have no connection with country N other than the Trustee and the Trust.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 115-228

International Tax Agreements Act 1953

Reasons for decision

Question 1

The terms resident and resident of Australia are defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

A company is a resident if:

•         it is incorporated in Australia, or

•         if the company is not incorporated in Australia, but it is either:

-   carrying on a business in Australia and its central management and control is in Australia, or

-   carrying on a business in Australia and its voting power is controlled by shareholders who are Australian residents.

Taxation Ruling TR 2018/5 Income tax: central management and control test of residency sets out the Commissioner's views on the meaning of central management and control, and the principles relevant to determining whether a company incorporated outside Australia is a resident under the central management and control test of residency.

TR 2018/5 states that four matters are relevant in determining whether a company meets central management and control test.

1) Does the company carry on business in Australia?

As noted in paragraph 7 of TR 2018/5, if a company carries on business and has its central management and control in Australia, it will carry on business in Australia within the meaning of the central management and control test of residency. It is not necessary for the substantive trading or investment activities of the business that generate its profits to take place in Australia.

2) What does central management and control mean?

TR 2018/5 provides that central management and control refers to the control and direction of a company's operations. The key element in the control and direction of a company's operations is the making of high-level decisions that set the company's general policies and determine the direction of its operations and the type of transactions it will enter.

The nature of a company's activities and business must be considered to determine which acts and decision are an exercise of the central management and control of that company. For example, where a company is a special purposes vehicle set up to conduct only two transactions, such as to buy and sell an asset, the decisions to buy and sell will be the only activities relevant to central management and control.

In this case, the A Limited acts as trustee of the Trust, individual A and B make all high-level decisions of the Trustee and direct the Trustee's operations and the types of transactions it enters. Moreover, they are the only directors and shareholders of the Trustee.

3) Who exercises central management and control?

Identifying who exercises central management and control is a question of fact. It cannot be determined solely by identifying who has the legal power or authority to control and direct a company. The crucial question is who controls and directs a company's operations in reality (Paragraph 19 of TR 2018/5).

In this case, individuals as directors and shareholders of the A Limited, manage and operate the company. Accordingly, they exercise the Trustee's central management and control.

4) Where is central management and control exercised?

A company will be controlled and directed where those making its high-level decisions do so as a matter of fact and substance.

In this case, A Limited as the Trustee of A Trust, its central management and control is exercised in Australia because individual A and B live in Australia and are tax residents of Australia; as directors and shareholders of the company, control and direct the company in Australia; moreover, they make all key management and strategic decisions in Australia.

Accordingly, A Limited satisfies the central management and control test of residency and is therefore is a resident of Australia for taxation purposes.

Question 2

A trust will be a resident trust for taxation purposes if a trustee of the trust estate is a resident of Australia or its central management and control in Australia.

In this case, the Trust is a discretionary trust. As discussed in question 1, the Trustee is a resident of Australia. Accordingly, the Trust is a resident of Australia for taxation purposes.

Question 3

Capital gains included in the net income of a trust are brought to tax in accordance with Subdivision 115-C of the ITAA 1997, which operates to ensure that a beneficiary of a trust who is made 'specifically entitled' to a capital gain made by the trustee will be assessed on it.

Section 115-228 of the ITAA 1997 sets out when a beneficiary will be regarded as specifically entitled to a trust's capital gain.

In this case, the Trust is a resident trust of Australia for taxation purposes and therefore the gain is included in the income of the Trust. The Trust is a discretionary trust. Individual A and B are discretionary beneficiaries of the Trust. The Trust is permitted by its Trust Deed to be able to stream capital gains to beneficiaries.

Individual A and B are residents of Australia for taxation purposes, they are liable to pay income tax on all their worldwide income. Accordingly, the capital gain made from disposal of foreign properties is included as assessable income as they have been made specifically entitled to the capital gains made by the trust estate.

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