Edited version of your written advice

Authorisation Number: 1012825364776

Ruling

Subject: foreign trust distributions

Question 1

Will the distributions from the capital of the Trust, assessable in your hands pursuant to section 99B of the Income Tax Assessment Act 1936 (ITAA 1936), be calculated by including the market value of the property transferred to the company by the trustee as the first element of the cost base of the share in Company C?

Answer

Yes

Question 2

In calculating the amount of the trust distribution assessable to you pursuant to section 99B of the ITAA 1936, should the first element of the cost base of the share attributable to the market value of the property be reflected in Australian dollars at the time it was transferred to the company by the trustee?

Answer

Yes

Question 3

In calculating the amount of the trust distribution assessable to you pursuant to section 99B of the ITAA 1936, should the consideration received for the sale of the property be reflected in Australian dollars at the time of the sale?

Answer

No

Question 4

In calculating the amount of the trust distribution assessable to you pursuant to section 99B of the ITAA 1936, should the capital proceeds received by the trust on the happening of hypothetical CGT event C2, be reflected in Australian dollars at the time of the event?

Answer

Yes

Question 5

In calculating the amount of the trust distribution assessable to you pursuant to section 99B of the ITAA 1936, should the capital proceeds received by the trust in respect to any interim distributions from the liquidator on the happening of hypothetical CGT event C2, be reflected in Australian dollars at the time of the event, being the date of those interim capital distributions to you (the beneficiary)?

Answer

Yes

Question 6

In calculating the amount of the trust distribution assessable to you pursuant to section 99B of the ITAA 1936, will the amount of the capital gain from the hypothetical capital gains tax (CGT) event C2 happening to the trustee of the trust be reduced by the 50% CGT general discount?

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 Trustee has provided a letter stating that the purpose of the subscription of the shares in Company C was to transfer the property from the Trust to Company C.

The market value of the property was determined as at the date it was registered as per land registry records.

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

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'.

The liquidation of Company C was finalised during the year.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 99B

Income Tax Assessment Act 1997 section 10-25

Income Tax Assessment Act 1997 section 960-50

Income Tax Assessment Act 1997 section 104-135

Income Tax Assessment Act 1997 section 115-10

Income Tax Assessment Act 1997 section 115-25

Income Tax Assessment Act 1997 section 115-100

Reasons for decision

Question 1

Cost base

Section 110-25 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the cost base of a CGT asset to a taxpayer consists of five elements.

1) First element - the amount of any money or the market value of any property the taxpayer paid or gave, or was required to pay or give, in respect of the acquisition of the asset (subsection 110-25(2) of the ITAA 1997).

2) Second element - the incidental costs the taxpayer incurred to acquire the asset or that relate to a CGT event that happens in relation to the asset. The costs can include giving property (subsection 110-25(3) of the ITAA 1997).

3) Third element - the costs of owning the asset provided the asset was acquired on or after 21 August 1991 (this element does not apply to a personal use asset or a collectable) (subsection 110-25(4) of the ITAA 1997).

4) Fourth element - the capital expenditure incurred, the purpose or expected effect of which is to increase or preserve the asset's value, or that relates to installing or removing the asset. Expenditure can include giving property (subsection 110-25(5) of the ITAA 1997)

5) Fifth element - the capital expenditure incurred by the taxpayer to establish, preserve or defend the taxpayer's title to, or a right over, the asset. The expenditure can include giving property (subsection 110-25(6) of the ITAA 1997).

Based on the information provided, it is accepted that the property was transferred to Company C in exchange for the share. Accordingly, the market value of the property, that the Trust was required to give for the acquisition of the share, is included in the first element of the cost base of the share.

Question 2, 3, 4 and 5

Australian currency

Section 960-50 of the ITAA 1997 discusses the translation of foreign currency amounts into Australian currency.

The table in subsection 960-50(6) at item 5 explains that for CGT events, amounts or value, is to be translated at the exchange rate applicable at the time of the transaction event. For amounts of statutory income (other than an amount included in assessable income under Division 102 (about capital gains)) at item 7, if the amount is received at or before the time when the requirement first arose to include it in your assessable income - the amount is to be translated to Australian currency at the exchange rate applicable at the time of receipt. In any other case, the amount is to be translated to Australian currency at the exchange rate applicable at the time when the requirement first arose to include it in your assessable income.

When should the cost base of the share be reflected in Australian dollars?

When the trust disposed of the property in 'payment' for the acquisition of the share, CGT event A1 happened. Subsection 104-10(3) of the ITAA 1997 provides that the time of CGT event A1 is when you enter into the contract for the disposal, or if there is no contract - when the change of ownership occurs. Accordingly, the cost base of share (being the market value of property) should be calculated at the time of the event, which in this case is when the transfer of the property was made.

When should the consideration received from the cancellation of the share be reflected in Australian dollars?

When the trust received interim payments from the liquidator of the company, CGT event G1 happened. However, these payments are disregarded (ie G1 is ignored) if the company ceases to exist within 18 months of the payment. Rather, these payments are treated as capital proceeds from CGT event C2 to happening to the shares (subsection 104-135(6) of the ITAA 1997).

In your case, the liquidation of the company was finalised and the distributions were received within 18 months of this date, so CGT event G1 will not apply. Therefore it is the time of CGT event C2 that is relevant for the currency conversion date. The time of CGT event C2 happening to the trust was when the company was finalised. This is date at which the foreign currency translation should be calculated.

When should the distributions received by you (the beneficiary) be reflected in Australian dollars?

The interim distributions were received at or before the time when the requirement arose to include it in your assessable income (being 30 June 2013). Accordingly, the amount is to be translated to Australian currency at the exchange rate applicable at the time of receipt.

Question 6

Section 115-10 of the ITAA 1997 provides that a discount capital gain can be made by a trust. A 50% discount (section 115-100 of the ITAA 1997) may be applied to a discount capital gain realised by a trust where the asset that gave rise to the capital gain has been owned for a period of at least 12 months prior to the CGT event (section 115-25 of the ITAA 1997).

Based on the information provided, the trust has held the share in Company C for over 12 months. Accordingly, the 50% general discount can be applied to the discount capital gain made by the trust to arrive at the net capital gain amount for the trust.