Edited version of your private ruling

Authorisation Number: 1012035073835

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Capital gains tax event I1

Questions and answers:

Did becoming a foreign-resident of Australia for taxation purposes trigger a capital gains tax event with respect to your interest as a residuary beneficiary in the Estate?

No.

Are you subject to capital gains tax upon becoming absolutely entitled to assets of the Estate in the 2009-10 financial year?

No.

This ruling applies for the following periods:

Year ended 30 June 2001

Year ended 30 June 2004

Year ended 30 June 2010

The scheme commenced on:

1 July 2000

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.

The deceased died in the 1999-00 financial year.

Under the terms of the Will the balance of the estate (after debts, funeral and testamentary expenses were deducted) was bequeathed upon trust for the benefit of a life tenant during their life, with residuary beneficiaries benefitting from the capital after the life tenant's death.

The net income arising from the trust was directed by the terms of the Will to be paid to the deceased's child (the life tenant) during their lifetime.

The residuary estate after the life tenant's death was directed by the terms of the Will to be held on trust for you as well as others (the residuary beneficiaries) as tenants in common.

The trustees completed the administration of the estate during the course of the financial year ended 30 June 2002.

At the time you departed Australia in the 2000-01 financial year you held an interest in the estate.

The assets of the estate at this time included cash, shares in publicly listed Australian companies, units in publicly listed Australian unit trusts and two properties situated in Australia.

You returned to Australia and became a resident again in the 2001-02 financial year.

At the time you departed Australia again in the 2003-04 financial year the assets of the estate included cash, shares in publicly listed Australian companies, units in publicly listed Australian unit trusts and one property located in Australia.

At the time of departing Australia on both occasions neither you nor your associates owned at least 10% of the value of the shares in the companies or units in the unit trusts at any time during the five years before departing Australia.

On both occasions you did not make an effective choice to disregard any capital gain or capital loss on becoming a foreign resident.

The life tenant died in the 2009-10 financial year.

At the time of becoming absolutely entitled to the assets of the estate in the 2009-10 financial year some of the shares had been acquired by the deceased prior to 20 September 1985 and were owned by the deceased prior to their death.

All post-CGT shares held by the deceased as at the date death were sold by the estate and were reported in the estate's assessable income and distributed to the life tenant.

At the time of becoming absolutely entitled to the assets of the estate in the 2009-10 financial year there were some assets that had been acquired by the trustees of the estate and therefore were not owned by the deceased prior to their death.

At no time did the trust's assets consist (to the extent of more than 50% of its market value) of assets attributable to Australian real property. Therefore, under the new definition, your interest in the estate was not taxable Australian property.

The residuary beneficiaries were made absolutely entitled to the capital of the estate in the 2009-10 financial year.

The trust's assets at that date consisted of cash, portfolio holdings in listed shares and listed unit trusts. The two properties previously held by the estate had been sold several years prior the residuary beneficiaries becoming absolutely entitled to the capital of the estate.

Your share of the estate at that time comprised assets of cash, portfolio holdings in listed shares and listed unit trusts.

You were a resident of Australia for tax purposes at the time of the deceased's death in the 1999-00 financial year.

You ceased Australian residency in the 2000-01 financial year.

You determined you were a foreign-resident of Australia until you returned in the 2001-02 financial year.

You again became a foreign-resident of Australia from in the 2003-04 financial year and have continued as such to the present time.

Relevant legislative provisions

Income Tax Assessment Act 1936 ITAA 1936 Section 98(2A)
Income Tax Assessment Act 1936 ITAA 1936 Section 98(3)
Income Tax Assessment Act 1936 ITAA 1936 Section 272-65 of Sch 2F
Income Tax Assessment Act 1997 Section 100-10
Income Tax Assessment Act 1997 Section 100-20
Income Tax Assessment Act 1997 Section 104-75
Income Tax Assessment Act 1997 Subsection 104-75(1)
Income Tax Assessment Act 1997 Section 104-160
Income Tax Assessment Act 1997 Subsection 104-160(3)
Income Tax Assessment Act 1997 Subsection 104-165(2)
Income Tax Assessment Act 1997 Subsection 104-165(3)
Income Tax Assessment Act 1997 Section 128-15
Income Tax Assessment Act 1997 Section 128-20
Income Tax Assessment Act 1997 Section 136-25
Income Tax Assessment Act 1997 Section 855-15
Income Tax Assessment Act 1997 Section 855-20
Income Tax Assessment Act 1997 Section 855-40

Reasons for decision

Please note that all references are to the Income Tax Assessment Act 1997 (ITAA 1997).

Capital gains tax

Section 100-10 explains that capital gains tax (CGT) is income tax paid on any net capital gain made as the result of a CGT event taking place. CGT events are the different types of transactions that may result in a capital gain or capital loss.

Section 100-20 provides an explanation of the wide range of CGT events that can take place. Section 104-160 advises that CGT event I1 happens if you stop being an Australian resident.

CGT event I1

Prior to 12 December 2006, if CGT event I1 was triggered you had to look at each CGT asset (other than those having the necessary connection with Australia) that you owned just before your residency ended to see if a capital gain or loss had been made on it.

Section 136-25 outlined CGT assets having the necessary connection with Australia which included, among other things, an interest in a trust that is a resident trust for CGT purposes for the financial year in which the CGT event happens.

You ceased to be an Australian resident in the 2000-01 financial year. Similarly you ceased your Australian residency again in the 2003-04 financial year when you departed Australia after having returned for a period of just under 2 years.

On both occasions that you ceased residency, you were a residuary beneficiary in the deceased's estate. At that time the estate was in the hands of the trustees in accordance with the terms of the Will, for the purposes of maintaining a life tenant.

The assets of the estate consisted of cash, shares in publicly listed Australian companies, units in publicly listed Australian unit trusts and 2 properties located in Australia.

Neither you, nor any of your associates owned at least 10% of the value of the shares in the companies or the units at any time during the five years before you departed Australia.

We need to examine your ownership interests in these CGT assets left to you as a remainderman on both occasions when you ceased to be an Australian resident.

Conclusion

You had an ownership interest in an Australian resident trust when you left Australia on both occasions and became a foreign resident.

Under 136-25(4) an interest in a trust that is a resident trust for CGT purposes for the financial year in which the CGT event happens, is a CGT asset that has the necessary connection with Australia.

Therefore CGT event I1 did not happen with respect to your interest as a residuary beneficiary in the estate on either occasion when you departed Australia and ceased to be a resident of Australia for taxation purposes.

CGT on becoming absolutely entitled

A CGT event happens when a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 applies) as against the trustee (disregarding any legal disability the beneficiary is under). Similarly a CGT event happens if the trustee of a trust (except a unit trust or a trust to which Division 128 applies) disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest, or part of it, in the trust capital.

You were a foreign resident for taxation purposes in the 2009-10 financial year when you became absolutely entitled to the assets of the estate. We have established that you had an interest in an Australian resident trust which had the necessary connection with Australia when you last ceased residency in the 2003-04 financial year.

Changes to the law on 12 December 2006 as a result of the Tax Laws Amendment (2006 Measures No.4) Act 2006 meant that the range of assets on which a foreign resident is required to pay CGT has been reduced. These assets are now described as 'taxable Australian property' rather than 'CGT assets that have the necessary connection with Australia'.

Subdivision 855-A outlines the circumstances whereby a capital gain may be disregarded by a foreign resident. Specifically, under subsection 855-10(1) a capital gain or loss from a CGT event is disregarded if:

(a) you are a foreign resident, or the trustee of a foreign trust for CGT purposes, just before the CGT event happens; and

(b) the CGT event happens in relation to a CGT asset that is not taxable Australian property.

Further, section 855-40 exempts a capital gain that a foreign resident beneficiary in a fixed trust is taken to have made as a result of a CGT event happening (after 12 December 2006) to a CGT asset of a trust if, at the time of the event, the asset was not taxable Australian property of the trust and the trust is a fixed trust.

Fixed trusts

ATO ID 2006/279 Trust losses - fixed entitlement - beneficiaries of a deceased estate discusses the definition of a fixed trust.

It says that if 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.

You, as one of the residuary beneficiaries, had a vested interest in the income and capital of the estate. You had a present right to future enjoyment of your equal share of the income and capital.

Your interest in the income and capital of the estate was indefeasible. There is no condition in the trust instrument, the Will, by which any of the residuary beneficiaries could have lost their interest in the estate.

Consequently, as you had a vested and indefeasible interest in a share of the income and capital of the estate, you had a fixed entitlement to a share of the income and capital of the estate.

Therefore, as persons have fixed entitlements to all of the income and capital of the estate, the trust constituted by the estate was a fixed trust under section 272-65 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936).

Taxable Australian property

Five categories of CGT assets that are taxable Australian property are set out in the table in section 855-15:

1. taxable Australian real property

2. a CGT asset that:

i) is an indirect Australian real property interest; and

ii) is not covered by item 5;

3. a CGT asset that:

i) you have used at any time in carrying on a business through a permanent establishment in Australia; and

ii) is not covered by item 1, 2 or 5;

4. an option or right to acquire a CGT asset covered by item 1, 2 or 3; and

5. a CGT asset that is covered by subsection 104-65(3) of the ITAA 1997 (choosing to disregard a gain or loss on ceasing to be an Australian resident).

Taxable Australian real property

Under section 855-20 of the ITAA 1997, a CGT asset is taxable Australian real property if it is:

(a) real property 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 in Australia.

The assets to which you became absolutely entitled in the 2009-10 financial year, which included cash and shares do not satisfy the definition of taxable Australian real property as they are neither real property (within the ordinary meaning of that term) nor a mining, quarrying or prospecting right.

In addition, the units in the unit trusts, which were also included in the estate, have a market value of less than 10% of the estate, and therefore satisfy the requirements of section 855-40(2)(c)(ii).

Conclusion

Any capital gain or capital loss you made as a foreign resident resulting from a CGT event happening on becoming absolutely entitled to the assets of the estate in the 2009-10 financial year is disregarded under Section 855-40 of the ITAA 1997.

Note: A trustee may be taxed on behalf of a foreign resident beneficiary under sections 98(2A) and (3) of the Income Tax Assessment Act 1936 ITAA 1936. However, the trustee of the fixed trust in which the foreign resident beneficiary holds an interest will not be assessed in respect of any amount which is disregarded under subsection 855-40(3).