Edited version of your private ruling

Authorisation Number: 1012445302143

Ruling

Subject: Income - CGT - Non Fixed trust - Non Resident of Australia

Question and answers

Does section 855-10 of the Income Tax Assessment Act 1997 (ITAA 1997) disregard a capital gain that a beneficiary of a trust makes because of the operation of subsection 115-215 of the ITAA 1997?

No.

This ruling applies for the following periods

1 July 2012 to 30 June 2013

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.

A company is listed as the trustee for the trust.

The trust is a non fixed Australian resident trust.

The beneficiary of the trust is not a resident for Australian taxation purposes.

The beneficiary resides in a country that does not have an International Tax Agreement with Australia.

The assets of the trust consist of listed Australian equities, listed managed funds and cash.

The trust does not hold any other assets.

The Trustee of the trust intends to rebalance the share portfolio and as a consequence will realise capital gains.

The assets of the trust have been held for greater than 12 months.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 98A

Income Tax Assessment Act 1936 subsection 98(2A)

Income Tax Assessment Act 1936 subsection 98(3)

Income Tax Assessment Act 1997 Section 115-215

Income Tax Assessment Act 1997 subsection 115-215(3)

Income Tax Assessment Act 1997 subsection 115-215(4A)

Income Tax Assessment Act 1997 Section 855-10

Income Tax Assessment Act 1997 subsection 855-10(1)

Income Tax Assessment Act 1997 Section 855-40

Reasons for decision

Subsections 98(2A) and (3) of the Income Tax Assessment Act 1936 provides that where an individual beneficiary who is presently entitled to a share of the income of a trust estate is a non-resident at the end of the financial year, the trustee is assessed and liable to pay tax in respect of:

· so much of the share of the net income of the trust estate (net trust income) as is attributable to a period when the beneficiary was a resident, whatever the source of the income, and

· so much of the share as is attributable to a period when the beneficiary was not a resident and is also attributable to Australian sources.

Capital gains and non-resident beneficiaries

If the net trust income includes a net capital gain, subsection 115-215(3) of the Income Tax Assessment Act 1997 (ITAA 1997) treats a beneficiary who is assessed under subsection 98A(1) of the ITAA 1936 as having extra capital gains.

Subsection 115-215(4A) of the ITAA 1997 makes it clear that the beneficiary is taken to have made these capital gains even though no capital gains tax (CGT) event has happened.

Section 855-40 of the ITAA 1997 also exempts a capital gain that a foreign resident beneficiary in a fixed trust is taken (by section 115-215 of the ITAA 1997) to have made as a result of a CGT event happening to a CGT asset of a trust if, at the time of the event, the asset was not taxable Australian property of the trust.

The exemption does not apply if the trust is a non-fixed trust.

Although section 855-40 of the ITAA 1997 does not exempt a capital gain which a foreign resident beneficiary of a non-fixed trust is taken (by section 115-215 of the ITAA 1997) to have made as a result of a CGT event happening to non-taxable Australian property of the trust, the gain is nevertheless exempt under subsection 855-10(1) of the ITAA 1997.

Subsection 855-10(1) provides that a foreign resident can disregard a capital gain or capital loss from a CGT event if the CGT event happens in relation to a CGT asset that is not taxable Australian property.

However, if a beneficiary's capital gain arises from the operation of section 115-215 of the ITAA 1997, and not from the happening of a CGT event, the requirements of subsection 855-10(1) of the ITAA 1997 are not satisfied. This means the capital gain cannot be disregarded.

Application to your circumstances

The trust is a discretionary investment trust. This means the trust is a non-fixed trust, as the trustee has the discretion to distribute the income and capital of the trust.

The trust is a resident trust for CGT purposes that intends to rebalance the share portfolio and as a consequence will realise capital gains.

The CGT assets are not taxable Australian property.

The beneficiary of the trust is presently entitled to a share of the trust's net capital gain income and of which is attributable to Australian sources.

The beneficiary is a non-resident of Australian for taxation purposes.

As a result, subsections 98(2A) and (3) of the ITAA 1936 applies to assess the trustee and make the trustee liable to pay tax on the non-resident beneficiary's share of the net income of the trust.

The beneficiary has been taken to have made extra capital gains under subsection 115-215(3) of the ITAA 1997 as a result of the trust making a capital gain from the sale of CGT assets.

Subsection 855-10(1) of the ITAA 1997 does not apply to disregard any part of the capital gain in the hands of the non-resident beneficiary. This is because the beneficiary's capital gain arises from the operation of section 115-215 of the ITAA 1997, and not from the happening of a CGT event.

Accordingly, the capital gain cannot be disregarded or treated as a non-taxable capital gain.