Edited version of private advice

Authorisation Number: 1052119219179

Date of advice: 18 May 2023

Ruling

Subject: CGT - trust

Question 1

Is the Deceased Estate (the Trust) a Fixed Trust?

Answer

Yes.

Question 2

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

Answer

Yes.

Question 3

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

Answer

Yes.

This ruling applies for the following period:

Period ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Deceased (Person A) passed away on DD MM YYYY, leaving a will and supporting codicil dated DD MM YYYY and DD MM YYYY respectively.

The original will establishes a testamentary trust in which:

".....to pay the income arising therefrom to such daughter during her life and upon her death shall stand possessed of the corpus of the share of such daughter upon trust for the persons and in such shares and proportions as my said daughter shall be her last will or any codicil thereto appoint:.

Person A had one daughter named, Person B who died on DD MM YYYY. The remainder of the trust passes to her surviving children and one grandchild by power of appointment in her will as follows:

"......I exercise the power of appointment given to me under the will of my father Person A dated DD MM YYYY and administered by TRUSTEE in favour of my children Person C, D, E, F and G in equal shares".

This leaves the remainder of the trust distributable under the power of appointment to Person C, D, E, F and G. All five remaindermen are each presently entitled to one fifth of the income and corpus of the residual estate, upon vesting date DD MM YYYY.

All children are Australian tax residents with the exception of Person B's child Person D who resides in Country A and is a non-resident for tax purposes.

The Assets of the Trust consist of listed equities, listed in the ASX and unlisted managed funds.

Assets have since been sold by the trustee.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 272-5(1) of Schedule 2F

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

Income Tax Assessment Act 1997 Section 104-75

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

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

Income Tax Assessment Act 1997 Section 855-20

Reasons for decision

Question 1

Section 272-65 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) provides that a trust is a 'fixed trust' if persons have fixed entitlements to all of the income and capital of the trust.

Subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a trust is a fixed trust if entities have fixed entitlements to all of the income and capital of the trust.

Subsection 272-5(1) of Schedule 2F to the ITAA 1936 provides that, in relation to the meaning of the term fixed entitlement:

If, under a trust instrument, a beneficiary has a vested and indefeasible interest in a share of income of the trust that the trust derives from time to time, or of the capital of the trust, the beneficiary has a fixed entitlement to that share of the income or capital.

It is an essential element of subsection 272-5(1) of Schedule 2F to the ITAA 1936 that in order to have a fixed entitlement to a share of income or capital there must be a vested or indefeasible interest 'under a trust instrument'. In all cases, the determining factor in deciding if fixed entitlements exist will be the terms of the trust instrument under which the trust is constituted. Neither the form of the trust nor the labels that are attached to it can determine this question.

The meaning of the term 'vested and infeasible' (in the context of the Schedule 2F) has not been judicially considered. However, the term appears in Division 6 in subsection 95A(2) of the ITAA 1936 and in the context of that subsection, the term has been considered by the courts; for example, refer to Estate Mortgage Fighting Fund Trust v FC of T 2000 ATC 4,525; Walsh Bay Developments Pty Ltd v Commissioner of Taxation (1995) 95 ATC 4378; Dwight v Commissioner of Taxation (1992) 92 ATC 4192; Harmer v FC of T (1991) 91 ATC 5000.

Also relevant are MSP Nominees Pty Ltd v Commissioner of Stamps (SA) (1999) 198 CLR 494; 99 ATC 4937; Queensland Trustees Ltd v Commissioner of Stamp Duties (1952) 88 CLR 54; and Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490.

The term 'vested and indefeasible' is not defined in the taxation legislation and to date there is no 'ATO view' which defines or clarifies the term.

The Explanatory Memorandum (EM) to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 which introduced the trust loss measures gives an explanation in relation to the meaning of 'vested and indefeasible' interest in paragraphs 13.3 to 13.9.

What is a vested interest?

The EM states:

13.4 A person has a vested interest in something if the person has a present right relating to the thing. Stated simply, a vested interest is one that is bound to take effect in possession at some point in time. A vested interest is to be contrasted with a 'contingent' interest which may never fall into possession. If an interest of a beneficiary in income or capital is the subject of a condition precedent, so that an event must occur before the interest becomes vested, the beneficiary does not have a vested interest to the income or capital since such an interest is instead 'contingent' upon the event occurring.

13.5 In traditional legal analysis, a person can be said to be either 'vested in possession' or 'vested in interest'. A present interest, i.e. one that is being enjoyed, is said to be 'vested in possession'; a future interest, i.e. one which gives its holder a present right to future enjoyment, is said to be 'vested in interest'. A person is vested in possession where the person has a right to immediate possession or enjoyment of the thing in question. In the definition of fixed entitlement, 'vested' includes both vested in possession and vested in interest.

13.6 Because vested interests include future interests, a person can have a vested interest in a thing even though the person's actual possession and enjoyment of the thing is delayed until sometime in the future.

When is a vested interest indefeasible?

The EM states:

13.7 A vested interest is indefeasible where, in effect, it is not able to be lost. A vested interest is defeasible where it is subject to a condition subsequent that may lead to the entitlement being divested. A condition subsequent is an event that could occur after the interest is vested that would result in the entitlement being defeated, for example, on the occurrence of an event or the exercise of a power. For example, where a beneficiary's vested interest is able to be taken away by the exercise of a power by the trustee or any other person, the interest will not be a fixed entitlement.

13.8 Where the trustee exercises a power to accumulate income or capital of the trust in accordance with the trust deed, the accumulation does not result in a beneficiary's interest being taken away or defeased as long as the beneficiary nevertheless remains entitled at some future time to enjoy his or her share of the income or capital which has been accumulated.

Application to your situation

In this situation the residuary beneficiaries, being Persons C, D, E, F and G, are able to take possession of their interests in the income and capital of the Trust after the death of Person B as provided in the Deceased's will.

There is no condition in the Deceased's will, by which any of the residuary beneficiaries could lose their interest in the Deceased's estate. Therefore, the remainder beneficiaries have a vested and indefeasible interest in the income and capital of the Trust.

Given that the interests of Persons C, D, E, F and G in the income and capital of the Trust are vested and indefeasible, it is concluded that fixed entitlements exist in accordance with subsection 272-5(1) of Schedule 2F to the ITAA 1936. As such the Trust is a fixed trust in accordance with section 272-65 of Schedule 2F of the ITAA 1936 and subsection 995-1(1) of the ITAA 1997.

Question 2 & 3

Capital gains tax event E5

Section 104-75 of the ITAA 1997 provides that a capital gains tax (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 of the ITAA 1997 applies, such as a deceased estate) against the trustee, disregarding any legal disabilities the beneficiary may be under.

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.

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.

Application to your situation

In this case, Person C, D, E, F and G became absolutely entitled to the residual assets of the Deceased Estate upon the passing of Person B. Therefore, CGT event E5 occurred. Prior to the CGT event E5 occurring, Person D was a foreign resident.

The assets subject to the CGT event E5 are listed Australian securities and unlisted managed funds which are not taxable Australian property.

All requirements of subsection 855-40(2) of the ITAA 1997 have been met and the capital gain made by Person D can be disregarded.

Additionally, subsection 855-40(3) of the ITAA 1997 provides that as the 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, you are not liable for any capital gain arising from CGT event E5 occurring.

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