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Ruling

Subject: Income - assessable

Question 1

Is the trustee of the deceased estate assessable on an Australian-sourced capital gain to be distributed to its sole beneficiary which is a non-resident trust estate which will ultimately distribute to resident and non-resident beneficiaries?

Answer

Yes

Question 2

Is the trustee assessed as if the 50% discount had applied to the capital gain?

Answer

No

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

You are the Trustee of a deceased estate.

The deceased was a non-resident at the date of death.

In the 2011-12 financial year, the trust entered into a contract for the sale of a property located in Australia.

The property was acquired after the introduction of the capital gains tax (CGT) provisions and the main residence exemption did not apply to the property.

As a result of the sale, the trust has derived a capital gain which will be distributed to a non resident trust estate as the sole beneficiary to the estate.

This non resident trust estate will in turn make distributions to the ultimate beneficiaries, some of which are residents and some non-residents.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 98(4)

Income Tax Assessment Act 1997 Section 115-220

Reasons for decision

Summary

You will be liable to pay tax in respect of the trustee beneficiary's share of the trust's net income attributable to Australian sources as the trustee beneficiary is a non-resident at the end of the income year.

You will not be entitled to a CGT discount as the effect of the discount is reversed under subparagraph 115-220(2)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) and you are assessed as if the discount had not applied to the capital gain.

Detailed reasoning

Generally, the net income of a trust is taxed to beneficiaries of the trust under section 97 of the Income Tax Assessment Act 1936 (ITAA 1936). However, section 98 applies in certain cases to tax a trustee in relation to a beneficiary, including where a beneficiary is a non-resident at the end of an income year. Trustees are taxed in relation to non-resident beneficiaries to assist in the collection of Australian tax on relevant income.

Prior to changes announced in the 2006-07 Federal Budget, subsection 98(3) provided that a trustee was liable to pay tax on a non-resident company beneficiary's share of the net income of the trust and subsection 98(4) provided that a trustee was liable to pay tax on a non-resident individual beneficiary's share of the net income of the trust. However, a trustee was not liable to pay tax if the beneficiary was acting in the capacity of trustee of another trust.

In the 2006-07 Federal Budget, however, the Treasurer announced that the law would be amended so that trustees would be assessed in respect of non-resident trustee beneficiaries. The Treasurer's Press release No. 039/2006 stated:

The intent of this measure is to ensure that trust distributions to non-resident trustees are taxed in the same way as distributions to other non-resident beneficiaries. This measure will improve integrity relating to trust distributions by introducing a taxing point in Australia on distributions to non-resident trustee beneficiaries and will ensure that these distributions are taxed in a manner consistent with distributions to other non-residents.

The legislation introducing these changes received Royal Assent on 21 June 2007. It applies to income years starting on or after 1 July 2006.

Changes to the operation of subsections 98(3) and 98(4) of the ITAA 1936

The amendments extend the circumstances in which a trustee is taxed in respect of a non-resident beneficiary to include non-resident trustee beneficiaries (new subsection 98(4) of the ITAA 1936).

A trustee is liable to pay tax in respect of a trustee beneficiary's share of the trust's net income attributable to Australian sources if the trustee beneficiary is a non-resident at the end of that income year. If the beneficiary trust has more than one trustee, subsection 98(4) of the ITAA 1936 will apply if at least one trustee is a non-resident at that time.

Trustee tax - not a final tax

Tax assessed to a trustee in relation to a non-resident beneficiary is generally not a final tax.

If the trustee is assessed under subsection 98(4) of the ITAA 1936 in respect of a trustee beneficiary, the trustee beneficiary and any later trustee in the chain of trusts is not assessed again on that amount under section 98, 99 or 99A of the ITAA 1936. However, an amount may be taxed to an ultimate individual or company beneficiary under subsection 97, 98A(3) or 100 of the ITAA 1936 and allowed a credit under section 98B of the ITAA 1936.

This treatment is, in effect, similar to a withholding system because the beneficiary is still assessed on these amounts but can reduce their tax liability by the tax paid by the trustee.

Capital gains

Section 115-220 of the ITAA 1997 applies where the trustee is assessed under section 98 of the ITAA 1936 on a beneficiary's share of a capital gain if the beneficiary is a foreign resident.

Section 115-30 of the ITAA 1997 deems the trustee to have acquired the asset when the deceased acquired it. This means that the trustee can dispose of the asset within 12 months of acquiring it and still be eligible to treat any capital gain as a discount capital gain.

However, the effect of the CGT discount will be reversed to the extent that the trustee is assessed under subsection 98(4) of the ITAA 1936, where a non-resident trust is presently entitled to trust income: subparagraph 115-220(2)(b) of the ITAA 1997. The trustee is assessed as if the discount had not applied to the capital gain.