Edited version of your private ruling

Authorisation Number: 1012426443132

Ruling

Subject: Income - foreign losses

Question and Answer

1. Will profits or losses from an overseas business operation undertaken by Overseas Company 2., overseas, through a bare trust arrangement, on your behalf, be recorded as foreign income or losses to you?

Yes.

2. Can foreign losses being reported back to you, be able to be off-set against any domestic investment income in your income tax returns for the same year?

Yes

This ruling applies for the following period

1 July 2010 to 30 June 2011

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.

Australian Company 2 was incorporated.

Individual 2 is 100% shareholder of the Australian Company 2.

Australian Company 2 was set up for the sole purpose of being the Trustee of the Australian Trust.

The Australian Trust was settled.

The Australian Trust was established to hold assets that were to be used in conjunction with the business being operated in foreign country by Australian Company 1.

Overseas Company 2 was established at the same time, and exists to hold the assets in the foreign country, including the property, under a Bare Trust Arrangement for the Australian Trust in Australia.

A Nominee Agreement commenced between the Overseas Company 2 (Nominee) and Australian Company 2 as trustee for the Australian Trust (Owner).

Under the Nominee Agreement it states the following;

1.1 The Nominee holds the property and all right, title and interest therein as nominee for and on behalf of the owner;

1.2 The Nominee otherwise has no legal or beneficial interest in the Property; and

1.3 All other attributes of the beneficial ownership of the Property shall be and remain the Owner.

2.1 The Nominee shall at all times and from time to time deal with the Property as nominee for the Owner only in accordance with the written or verbal instructions and directions of the Owner and not otherwise;

The Australian Trust has an attribution percentage in the Overseas Company 2 of 100%.

The Overseas Company 2 was established to resolve land registration as well as some other local issues; an Australian entity is unable to be registered as the lease-holder of the 99 year lease taken out on the property to operate the business.

The year ended 30 June 20XX is the first year that the Australian Trust has been in operation.

You propose to show the income from the foreign country only in the Australian Trust.

You are not required to lodge income tax returns in the foreign country because the foreign country imposes no income tax (personal or corporate) or capital gains tax on either residents or non-residents with the foreign country's sourced income.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not considered the application of Part IVA to the arrangement you asked us to rule on.

Reasons for decision

Bare Trusts

According to taxation law, a trust is a bare trust where the trustee has no interest in the trust assets other than that existing by reason of the office of trustee and holding the legal title, and who never has had active duties to perform or who has ceased to have those duties with the result that in either case the property awaits transfer to the beneficiaries or at their direction (see Herdegen & Anor v. Federal Commissioner of Taxation 88 ATC 4995; (1988) 84 ALR 27).  

That is, the trustee would have to hold the property without any duties to perform other than to convey the property to the beneficiary or as the beneficiary directs. Gummow J in Herdegen states that trustee would have no interest in the trust assets other than that existing by reason of the office and the legal title as trustee and who never have had any active duties to perform such that the property awaits transfer to the beneficiaries at their direction.

You have stated that the Overseas Company 2 exists to hold the assets in the overseas country, under a Bare Trust arrangement for the Australian Trust in Australia.

You advised the overseas entity was established to resolve land registration as well as some other local issues; an Australian entity is unable to be registered as the lease-holder of the 99 year lease taken out on the property to operate the business.

It is stated under the Nominee Agreement the following;

1.1 The Nominee holds the property and all right, title and interest therein as nominee for and on behalf of the owner;

1.2 The Nominee otherwise has no legal or beneficial interest in the Property; and

1.3 All other attributes of the beneficial ownership of the Property shall be and remain the Owner.

2.1 The Nominee shall at all times and from time to time deal with the Property as nominee for the Owner only in accordance with the written or verbal instructions and directions of the Owner and not otherwise;

Accordingly, profits or losses from the overseas business operation, undertaken by the Overseas Company 2, through a bare trust arrangement, on your behalf, can be recorded as foreign income or losses to you.

Foreign losses

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

The Overseas Company 2 exists to hold the assets in the overseas country for the Australian Trust in Australian and you propose to show the income from the Overseas Company 2 only in the Australian Trust.

Therefore, any foreign losses being reported back to the Australian Trust can be off-set against any domestic investment income in the Australian Trust income tax returns for the same year.