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Ruling

Subject: CGT - a trust, deceased estate and a company

Question and Answer

Trust

Are non-residents of Australia entitled to the 50% Capital Gains Tax discount for any capital gain distributions by the trustee of the trust?

Yes.

Does the trustee of the trust pay the beneficiary's tax, at the non resident tax rates, after accounting for the 50% Capital Gains Tax discount?

Yes.

Is any Capital Gains Tax arising from pre-Capital Gains Tax assets, of the trust, distributed to the non-residents of Australia, exempt from Capital Gains Tax?

Yes.

The Estate

Are non-residents of Australia entitled to the 50% Capital Gains Tax discount for any capital gain distributions by the executor of the estate?

Yes.

Does the executor of the estate pay the beneficiary's tax, at the non resident tax rates, after accounting for the 50% Capital Gains Tax discount?

Yes.

This ruling applies for the following period

1 July 2010 to 30 June 2012

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.

Post 20 September 1985 the deceased passed away.

Trust

Pre-CGT, by Deed of Settlement, the Trust was created.

The trust is registered in Australia.

The beneficiaries acquired their beneficial interests at the time of the trusts creation.

There was no consideration paid by the beneficiaries for their respective entitlement in the trust.

The trust is being wound up.

Assets of trust (sold and converted to cash)

Pre-CGT the trust purchased property 1.

Post-CGT property 1 was sold.

Post-CGT the trust purchased property 2.

Post-CGT property 2 was sold.

The Estate

The deceased estate belongs to a non-resident of Australia.

The rulee is the legal Personal Representative for the deceases estate.

Asset of the estate (sold and converted to cash)

Post-CGT property purchase by the deceased's parents transferred to the deceased as a joint tenant.

The property became income producing prior to 20 August 1996 (the property was always a rented property).

The parents passed away.

The income from the property was assigned to The Trust.

The property was sold post-CGT.

The Company

The Company is a beneficiary of The Trust.

The company is registered in Australia.

Beneficiaries

The spouse of the deceased, non-resident of Australia.

Child 1 and 2, which are non-residents of Australia.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-215

Income Tax Assessment Act 1997 subsection 104-215(1)(e)

Income Tax Assessment Act 1997 subsection 104-215(5)

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 115-100

Income Tax Assessment Act 1997 subsection 128-15(4)

Income Tax Assessment Act 1997 Section 136-25

Reason for Decision

Capital gains tax (CGT) is the tax that you pay when a CGT event happens to a CGT asset that you own. Section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997) describes what is considered a CGT asset. A CGT asset is any kind of property, or a legal or equitable right that is not property.

Under section 104-10 of the ITAA 1997, the disposal of a CGT asset gives rise to CGT event A1. The disposal of a CGT asset takes place if a change of ownership occurs from the taxpayer to another entity, whether because of some act or event or by operation of law.

Assets that have a necessary connection with Australia

Any capital gain or capital loss made on assets that the deceased acquired before

20 September 1985 (pre-CGT) will be disregarded. (subsection 104-215(5) of the ITAA 1997). For pre CGT assets the residency of the beneficiary has no effect on the CGT implications.

Division 136 of the ITAA 1997 sets out the CGT rules that apply to non-residents. Generally, a non-resident makes a capital gain or loss only if the CGT event happens to a CGT asset that was acquired after September 1985 that has the necessary connection with Australia.

The categories of assets that have the necessary connection with Australia for CGT purposes are set out in section 136-25 of the ITAA 1997. They include:

· A land or building or structure in Australia

· A share or an interest in a share, in a private company that is an Australian resident for the income year in which the CGT event happens.

· An interest in a resident trust for CGT purposes for the income year in which the CGT event happens.

A share, or an interest in a share, in a public company that is an Australian resident for the income year in which the CGT event happens and in which the taxpayer and associates beneficially owned at least 10% by value, of the shares of the company (except shares that carried a right only to participate in a distribution of profits or capital to a limited extent) at any time during 5 years before the CGT event happens.

A unit in a unit trust that is a resident trust for CGT purposes for the income year in which the CGT event happens and in which the taxpayer and associates beneficially owned at least 10% of the issued units at any time during the five years before the CGT event happens.

If any assets that have "a necessary connection" with Australia, passes to the non-resident beneficiary, they are not deemed to be disposed by the deceased immediately before death (section 104-215 of the ITAA 1997).

The non-resident beneficiary will be deemed to have acquired the asset that have a necessary connection to Australia at the date of death of the deceased. However for the purpose of looking the CGT discount, the non-resident beneficiary is deemed to have acquired the asset as follows;

· if it is pre CGT asset, it is deemed to have acquired them for its market value at the date of death (section 128-15(4) of the ITAA 1997).

· if it is post CGT asset, the beneficiary is deemed to have acquired the asset, when the deceased acquired them for the same cost base as the deceased (section 128-15(4) of the ITAA 1997).

Capital gains tax will apply to these assets when the non-resident beneficiary sells these assets or when other CGT event happens to them.

CGT event K3 happens if a CGT asset you owned just before dying passes to a beneficiary in your estate who is not an Australian resident (subsection 104-215(1)(e) of the ITAA 1997).

If the asset passes to a beneficiary who is not an Australian resident, CGT event K3 only happens if:

(a) the deceased was an Australian resident just before dying; and

(b) the asset (in the hands of the beneficiary) does not have the necessary connection with Australia.

Application to your circumstances

The residency of the beneficiary has no effect on the CGT implications of pre CGT assets; therefore the non-residents will also be exempt from CGT on pre-CGT assets.

Event K3 did not happen as the deceased was not an Australian resident before dying and the asset/s do have a necessary connection with Australia.

The discount method

Where a CGT event A1 occurs, a discount is available on the capital gain where the following conditions in Division 115 of the ITAA 1997 are met:

1.      the capital gain is made by an individual

2.      the CGT event occurred after 11:45am on 21 September 1999

3.      the cost base has not been indexed, and

4.      the asset must have been acquired at least 12 months before the CGT event.

Where these conditions are met, the capital gain is reduced by 50% for individuals (section 115-100 of the ITAA 1997).

Application to your circumstances

The non-resident beneficiaries of The Trust and The Estate are entitled to the 50% CGT discount as the conditions in Division 115 of the ITAA 1997 have been met.

Non-resident beneficiary

The trustee will be assessed on behalf of the non-resident beneficiary (subsection 98(3) of the ITAA 1936) on a capital gain included in the net income of the trust if it is attributable to sources in Australia. If the non-resident beneficiary lodges their own income tax return in Australia they will need to include the same capital gain in their return and be entitled to a credit for any tax paid by the trustee on their behalf.

Application to your circumstances

The trustee and the executor will be assessed on behalf of the non-resident beneficiaries of The Trust and The Estate on any capital gain, at the non-resident tax rates, after accounting for the 50% CGT discount.

Application to your circumstances

When The Trust makes a distribution to The Company it is taxable at the company tax rate.