Edited version of your written advice

Authorisation Number: 1012932367538

Date of advice: 13 April 2016

Ruling

Subject: Attributable income of a listed country trust

Questions and Answers

Are you in receipt of any amount of attributable income from a non-resident trust estate when no income is distributed to you?

Yes

Can you carry forward prior year capital losses from the disposal of tainted assets to offset capitals gains from tainted assets in the current or future accounting periods?

No

This ruling applies for the following period

Financial year ended 30 June 2014

The scheme commences on

1 July 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.

You are the beneficiary of trust income from listed country

To date, no distributions of trust income have been made.

Your total capital losses exceeded your capital gains in the financial year.

The income of the trust is fully assessed in the listed country.

You have provided a Capital Gains worksheet that to date shows a carried forward loss.

The assets of the Trust comprise:

1. Real property

2. Share portfolio held under a Custodial arrangement with and investment firm.

3. Bank accounts.

Relevant legislative provisions

Section 97 of the Income Tax Assessment Act 1936

Section 98 of the Income Tax Assessment Act 1936

Section 99 of the Income Tax Assessment Act 1936

Section 99A of the Income Tax Assessment Act 1936

Section 99B of the Income Tax Assessment Act 1936

Section 102AAM of the Income Tax Assessment Act 1936

Section 102AAT of the Income Tax Assessment Act 1936

Section 102AAU of the Income Tax Assessment Act 1936

Section 102AAZB of the Income Tax Assessment Act 1936

Section 319 of the Income Tax Assessment Act 1936

Section 445 of the Income Tax Assessment Act 1936

Section 446 of the Income Tax Assessment Act 1936

Regulation 17 of Part 8 of the Income Tax Assessment (1936 Act) Regulation 2015

Reasons for decision

Transferor Trusts

Under the transferor trust measures, residents of Australia who have transferred property (including money) or services to a non-resident trust estate, are subject to accruals taxation on certain profits derived by the trust. The reference to transfer of property or services to a trust includes the transfer of property or services by way of creation of a trust. You have indicated you are a transferor.

Section 99B of the Income Tax Assessment Act 1936 (ITAA 1936) can assess amounts paid to, or applied to the benefit of, a resident beneficiary of a foreign trust estate; for example, it can apply to distributions out of accumulated foreign income or gains of the trust. You have indicated that you have not received a distribution from the non-resident trust in the financial year ended 30 June 2014.

Where amounts of foreign trust income are not paid to a resident beneficiary, amounts of trust income may be attributable to you as a resident of Australia and therefore included in your assessable income.

Attributable taxpayer

An attributable taxpayer in relation to a discretionary trust is defined in section 102AAT of the ITAA 1936 to mean an entity (you) that has transferred property or services to the discretionary trust being a non-resident trust, before or during the entity's current year of income, provided the trust was a discretionary trust at any time during that year, and provided it was not a public unit trust at all times during that year.

Attributable income

Where a trust estate is a listed country trust estate section 102AAE of the ITAA 1936, the attributable income is the amount that would have been the net income of the trust estate for the same purposes and with the same modifications as in the case of an unlisted country estate, but in which the exempt income of the trust estate includes all income or profit other than eligible designated concession income in relation to any listed country, less amounts referred to later.

Designated concession income of a listed country

The definition of designated concession income in relation to your listed country (the location of your trust) is listed in the Regulations to the Income Tax Assessment Act (1936) as either:

(a) Ordinary capital gains in respect of tainted assets delivered by a company that is a resident of your listed country and is not subject to tax in your listed country; or

(b) Ordinary capital gains in respect of tainted assets delivered by a business or a permanent establishment entity of Your listed country and is not subject to tax in your listed country.

ordinary capital gains means gains or profits of a capital nature that:

(a) arise from the sale or disposal of all or part of a CGT asset; and

(b) are not gains or profits that would not be capital gains but for a provision of Australian tax law.

A tainted asset is defined to mean an asset of a company that produces "passive income", examples of passive income include rental income, dividends and interest income. You are in receipt of income from tainted assets.

Calculating your attributable income

A net gain from the disposal of a tainted asset is the surplus of gains in relation to the disposal of tainted assets during a statutory accounting period over losses in relation to the disposal of tainted assets during the same statutory accounting period. (Section 445 of the ITAA 1936).

It should be noted that where gains equal losses or where losses exceed gains there is no net gain, and any excess does not carry forward to the next statutory accounting period to be offset against net gains for that period.

The expression statutory account period is defined in section 319 of the ITAA 1936 to mean each period of 12 months ending on 30 June, which is the Australian financial year. However, as you are an attributable taxpayer a provision exists where you have an attribution percentage of 100%, you can lodge an election under section 319 to vary the accounting period (section 319(7)). A copy of TD 92/104 has been enclosed to provide you information on making an election.

Where an ordinary capital gain is reported by a discretionary trust

In calculating the tax payable under section 102 of the ITAA1936, the net income of the trust estate is reduced by the following amounts (section 102(2B) of the ITAA 1936):

(a) so much (if any) of the relevant trust income as is attributable to a period during which the settlor is a non-resident and is also attributable to foreign sources;

(b) so much (if any) of the relevant trust income as is not covered by (a) and is included in the assessable income of any taxpayer under section 102AAZD of the ITAA 1936, which is the charging section in Div 6AAA of Pt III of the ITAA 1936. In very general terms, Div 6AAA provides for the attributable income of an Australian controlled non-resident trust to be assessed, on an accruals basis to a resident where the resident has directly or indirectly transferred value to the trust and the transfer was made, in the case of a discretionary trust, at any time.

Div 6AAA of the ITAA 1936 includes in the assessable income of each attributable taxpayer all of the attributable income of the trust estate: section 102AAZD(2) of the ITAA 1936. However, the Commissioner is given a discretion to afford relief in cases where there are multiple transferors, and the taxpayer gives to the Commissioner such information and produces to the Commissioner such documents as the Commissioner requires: section 102AAZD(3) of the ITAA 1936.

Section 102AAZD(3) of the ITAA 1936 has the effect that, unless the Commissioner determines otherwise, each transferor of property or services to a non-resident trust estate, with an exception in regard to a natural person who transferred property or services to a non-resident family trust, is an attributable taxpayer to whom or to which the whole of the attributable income of the trust estate may be attributed, notwithstanding that there might be a number of such transferors. This intended result was explained in the explanatory memorandum as a means of ensuring that a resident who chooses to transfer property or services to a non-resident trust estate in circumstances that attract the provisions of Div 6AAA ought to take steps to ensure that there are no other transferors in relation to the same trust estate.

However, the explanatory memorandum then states that, in order to ensure that this result does not operate harshly against a taxpayer whose transfer of property or services to a non-resident trust estate was not motivated by tax avoidance, section 102AAZD(3) of the ITAA 1936 authorises the Commissioner to reduce the amount that, but for the reduction, would be included. Section 102AAZD(3) of the ITAA 1936 requires each taxpayer faced with the problem to provide the Commissioner with such information as is contained in a form approved for that purpose. Notwithstanding the provision of this form, there is no obligation on the Commissioner to give effect to a reduction. This is left to be determined by the Commissioner having regard to:

(i) the extent to which the attributable income of the trust estate is, in the opinion of the Commissioner, attributable to property or services transferred by the taxpayer; and

(ii) such other matters as the Commissioner considers relevant.

While subsection 102AAZD of the ITAA 1936 refers to information provided by approved form, paragraph 12 of Taxation Ruling TR 2007/13 states:

The necessary information will include documents and records relating to all the relevant transfers (including deemed transfers) showing the identities of all the transferors, dates and details of their transfers and the percentage of attributable income that is attributable to those transfers.

As such there is not a pro-forma document and your request for the Commissioner's discretion would be sought with reference to the aforementioned.

Amounts that may be excluded from attributable income

In determining the attributable amount, the net income of a non-resident trust estate is reduced by the following amounts to the extent they relate to amounts included in the net income of the trust estate:

• amounts that have been included in the assessable income of a beneficiary under section 97 of the ITAA 1936: that is, amounts to which a beneficiary is presently entitled

• amounts where the trustee of the non-resident trust estate has been assessed and is liable to pay tax under section 98 of the Act: for example, on behalf of a resident beneficiary under a legal disability

• amounts where the trustee of the non-resident trust estate has been assessed and is liable to pay tax under section 99 or 99A of the ITAA 1936: for example, where the trust has undistributed Australian source income

• amounts paid to beneficiaries who are residents of a listed country if those amounts are paid during the non-resident trust estate's income year or within one month after the end of the income year; these amounts must be subject to tax in a listed country in a tax accounting period ending before the income year or commencing during the income year

• franked dividends: that is, dividends paid by Australian companies or similar amounts paid by corporate unit trusts and public trading trusts, out of profits that have been subject to Australian tax

• amounts included in the assessable income of the trustee of a trust estate where a dividend is grossed up for dividend imputation purposes

• amounts received by a trustee from another trust estate to the extent that the amount has already been attributed to a transferor

• amounts received by the trustee that are referable to the income or profits of a CFC that have been included in the assessable income of any resident taxpayer under the CFC measures

• income or profits of the trust estate (other than eligible designated concession income) that are subject to tax in any listed country in a tax accounting period ending before the end of, or commencing during, the non-resident trust estate's income year

• amounts of foreign tax or Australian tax paid by the trustee or a beneficiary on amounts included in the attributable income of the trust estate.

For a listed country trust estate, exclude only the amounts that relate to the part of the net income that consists of eligible designated concession income.

Conclusion

As your trust paid income tax on its earnings in your listed country and you had some designated concessional income, only amounts of designated concessional income which are capital gains of the trust which have not been distributed to beneficiaries are included in your assessable income.

Your non-resident trust estate has returned a net capital loss from its tainted assets corresponding to the financial year in question. Therefore as an Australian resident beneficiary of the non-resident trust, you are in receipt of a class of income which is designated concession income but as these amounts for the period of this ruling are a loss, you would not include them as attributable income amounts until an accounting period where a net gain is reported by your trust. A capital gain in a financial year of a trust will only be attributable where there is a gain in the accounting period.

As section 445 of the ITAA 1936 defines net gains as being the sum of gains reduced by the amount of losses within a financial year, the definition restricted to only consider the losses within a reporting period and therefore prior year capital losses cannot be used to reduce a net capital gain in a future year.

In the future, if your listed country trust pays a distribution and you are a resident, the amount of trust distribution may become assessable under sections 97 and/or 99B of the Income Tax Assessment Act 1936.