Edited version of your written advice

Authorisation Number: 1012686203510

Ruling

Subject: trust distribution

Question

Will the distributions from the capital of the Trust be assessable in your hands pursuant to section 99B of the Income Tax Assessment Act 1936 (ITAA 1936) to the extent that the distribution would be attributable to a gain from capital gains tax (CGT) event C2 had the Trust been a resident taxpayer?

Answer

Yes.

This ruling applies for the following period(s)

Year ended 30 June 2013

The scheme commences on

1 July 2012

Relevant facts and circumstances

You are an Australian resident for tax purposes who has received distributions from a trust established by your relative.

The trust

The trust is a discretionary trust.

The Trust was established under the laws of a foreign country. The proper law of the settlement is the law of that land.

The trustees

The original trustee was the Company A.

This company was later replaced by a new trustee, Company B.

The beneficiaries

The beneficiaries of the Trust are A, B, C and "any other issue of the Settlor whether now living or born hereafter during the Trust Period".

Initially, there was no intent to sell the principal underlying asset of the trust, a property located overseas (the Property).

The trust fund

A is named in the deed as Settlor.

The 'Trust Fund' is defined by clause 1(p) of the Trust Deed as being (not quoted exactly):

(a) the money investments or other property specified in the Second Schedule;

(b) all money investments or other property hereafter paid or transferred by a person to or so as to be under the control of, and (in either case) accepted by the Trustee as additions to the Trust Fund;

(c) accumulations of income in accordance with a clause

(d) the money, investments and property from time to time representing the same, respectively.

Immediately before the distributions in question, the main asset of the trust was shares in a company, Company C, which in turn owned the Property.

History of the landholding

You have no control over the trust and rely on what you have been told by the foreign trust administrators.

The Trust purchased the Property from A by entering into a Sale and Purchase Agreement.

The Trust borrowed funds from an entity (the Creditor) by executing a Deed of Acknowledgement of Debt.

A settled cash in the Trust.

The Trust applied the same to repay loans due to the Creditor.

Later it proved convenient to transfer the property to a company.

The Property proved to be located on land which had become valuable. Ultimately a third party, presumably intent on property development, made an offer to purchase the land.

The Property was sold and distributions were to be made from the trust, as it received monies during the process of winding up Company C.

It is understood that Company C would distribute cash out of the surplus it holds.

Other features of trust deed

No beneficiary is stated as having a vested interest. Rather, all beneficiaries are merely objects of discretion. At the conclusion of the Trust Period, failing appointment, there is a gift over for charitable purposes.

A clause provides for the transfer etc. of the whole or any part of the capital of the trust fund to a Beneficiary.

There is also power at the expiration of the Trust Period to appoint capital and income amongst the Beneficiaries. However, it is unknown whether the trust is still on foot, or whether the vesting date has been advanced

Distributions of capital

First distribution of capital by trust

According to the resolution of the liquidators of Company C, that company commenced liquidation.

They resolved that 'the company should distribute a sum of money out of the surplus assets of the Company to its shareholder(s)'.

The Trustee resolved to make an interim distribution to you, in accordance with a clause of the Trust Deed.

That clause allows capital to be paid to a beneficiary. The payment was 'an interim distribution of capital of the Trust Fund out of its corpus'.

You gave the Trustee a 'Deed of Release, Discharge and Indemnity'.

Second distribution of capital by trust

A similarly worded resolution of the liquidators of Company C, distributed a further amount.

The Trustees made a similarly worded resolution dealing with an amount, having noted the first distribution.

You again gave the Trustee a deed of release.

The liquidation of Company C was finalised during the year.

Relevant legislative provisions

Income Tax Assessment Act 1936 - Section 99B

Income Tax Assessment Act 1936 - Section 47

Income Tax Assessment Act 1997 - Section 104-25

Income Tax Assessment Act 1997 - Division 855

Reasons for decision

Subsection 99B(1) of the ITAA 1936 provides that where an amount, being property of a trust estate, is paid or applied for the benefit of a beneficiary during a year of income, and the beneficiary was a resident at any time during the year, that amount is included in the assessable income of the beneficiary.

Paragraph 99B(2)(a) of the ITAA 1936 modifies the rule in subsection 99B(1) and has the effect that the amount included in assessable income under subsection (1) is reduced to the extent that the amount represents corpus of the trust estate, except to the extent to which the amount is attributable to amounts that would be assessable, if they were derived by a resident taxpayer.

The distributions made to you by the trustee pursuant to a clause are distributions of trust corpus so would not be assessable unless they are attributable to amounts that would be assessable to trustee had they been a resident taxpayer.

In Howard v. FCT (No 2) [2011] FCA 1421, the taxpayer asserted that an amount distributed to him by a non-resident trust estate was a distribution of the corpus of the trust estate and was therefore a capital receipt. The Commissioner did not take issue with this assertion, but said the amount was nevertheless assessable under section 99B of the ITAA 1936 to the extent that it was not assessable under section 97. The Court agreed, finding that when the amount that was later distributed to the taxpayer was derived by the trust, it would have been assessable if it had been derived by an Australian resident.

In this case, the property was owned by a foreign company, Company C, when it was sold. The liquidation of Company C, was finalised during the year.

The liquidator's distributions would not be assessable to the trustee resident taxpayer pursuant to section 47 of the ITAA 1936 because a gain from the sale of foreign land by a foreign company would not have come within the extended definition of income derived by a company in subsection 47(1A).

But that is not the end of the matter. CGT event G1 happens if a company makes a payment in respect of a share in a company and the payment is not a dividend or an amount that is taken to be a dividend under section 47 of the ITAA 1936. However a payment that is made within 18 months of the cessation of the company is disregarded for the purposes of this event. Rather those payments are treated as capital proceeds for CGT event C2 happening to the shares (subsection 104-135(6) of the Income Tax Assessment Act 1997).

The liquidation of the company was finalised during the year and the distribution was received within 18 months of that date. Accordingly, they would be treated as capital proceeds for the ending of the ownership of the shares.

To determine if the amounts received by you are assessable income under subsection 99B(1) of the ITAA 1936, we need to consider the hypothetical test in paragraph 99B(2)(a) of the ITAA 1936.

The hypothetical test is whether amounts received by the trust in relation to the ending of the share in Company C would have been assessable to the trust if the trust was a resident of Australia.

Had the trust been a resident of Australia at the time its ownership of the Company C share ended, CGT event C2 would have happened to the trust. Any net capital gain from the resulting C2 event would have been included in the assessable income of the trust.

Accordingly to the extent that the distribution to you is attributable to a gain from the hypothetical CGT event C2 happening to the trustee of the Trust, it will be assessable to you under section 99B of the ITAA 1936.