Edited version of your written advice

Authorisation Number: 1013056358250

Date of advice: 25 July 2016

Ruling

Subject: Distribution from trust

Question and Answer:

Do you, as a beneficiary of the Trust, have an income tax liability as a result of receiving a distribution from the Trust on the sale of the property located in Country A which was owned by the Trust?

Yes

This ruling applies for the following period:

Year ended 30 June 2015

The scheme commenced on:

1 July 2014

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 discretionary trust (the Trust) was established in Country A to purchase a Country A residential property after 1985. The Trust still exists.

There was more than one trustee, being individuals. You were one of the three trustees of the Trust as well as one of the beneficiaries.

The property was occupied by the trustees (including yourself in your capacity as trustee) as their main residence.

The property was less than 2 hectares in size.

You moved to Australia several years ago.

You are a resident of Australia for taxation purposes.

One of the trustees (T), being a resident of Country A, continued to live in the property as their main residence.

T in their capacity of trustee has always carried out the day to day activities for the trust, including managing the property in Country A.

In the relevant income year T purchased the property from the Trust and paid the Trust. They then gave you your share of the proceeds in your capacity of beneficiary.

You have been advised that the Trust is not required to lodge a tax return in Country A for the relevant income year as the trustees are not liable to pay any income tax and capital gains tax in Country A as the property was owner occupied.

There is a Double tax agreement between Australian and Country A (Country A Agreement)

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 95(2))

Income Tax Assessment Act 1936 Subsection 99B

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 115-25

International Tax Agreements Act 1953

Reasons for decision

Under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) a resident of Australia is assessable on their worldwide income.

You are an Australian resident who is a beneficiary of the Trust. As a result of the sale of the property (located in Country A) by the Trust in the relevant income year, you received a distribution from the Trust. We need to determine the assessability of the distribution.

Residency status of the Trust

Normally the residency status of a trust is not relevant as an Australian resident would be assessable on a distribution from a trust regardless of whether the trust is an Australian resident or a non-resident trust. However, sometimes the Double Tax Agreement (DTA) between two countries stipulates which country has the taxing right, depending on the source of income.

Under subsection 95(2) of the Income Tax Assessment Act 1936 (ITAA 1936), a trust is a resident of Australia in relation to a year of income if:

(a) a trustee of the trust was a resident at any time during the year of income; or

(b) the central management and control of the trust estate was in Australia at any time during the year of income.

In this case, there is more than one trustee of the Trust. One trustee (T) is a resident of Country A and at least one trustee is a resident of Australia. The property was sold by the Trust in the relevant income year. As there was at least one trustee who was an Australian resident in the relevant income year, the Trust is an Australian resident for Australian tax law purposes.

However, as one of the trustees was a Country A resident in the relevant income year, we need to consider the Double Tax Agreement between Australia and Country A (the Country A Agreement).

Country A Agreement - residence - non-individuals

The Country A Agreement operates to avoid the double taxation of income received by Australian and Country A residents.

Article 4(3) of the Country A Agreement provides that where a person other than an individual is a resident of both countries, it will be deemed to be a resident solely of the country in which its place of effective management is situated.

In this case the Trust deed was drawn up in Country A. T in their capacity of trustee is managing the day to day activities of the Trust in Country A. Thus for the purposes of the Country A Agreement the place of 'effective management' is in Country A and thus the Trust is a resident of Country A under the Country A Agreement.

Disposal of property by Trust

Article 13 of the Country A Agreement deals with the allocation of taxing rights between Country A and Australia in respect of income or gains derived from the disposition of property. Article 13(5) of the Country A Agreement provides that gains of a capital nature from the alienation of any property shall be taxable only in the country in which the alienator is a resident. As the Trust is the entity which disposed of the property and, the Trust is a resident of Country A for the purposes of the Country A Agreement, the Trust is only assessable on the capital gain on sale in Country A.

Assessability of trust distribution

As a general rule a beneficiary who is not under a legal disability and who is presently entitled to a share of the income of a trust must include in their assessable income their share of the net income of the trust estate (section 97 of the ITAA 1936).

Subdivision 115-C of the ITAA 1997 sets out rules that affect the calculation of a beneficiary's net capital gain if the beneficiary is assessed on a share of the net income of the trust which includes a capital gain.

However, as the capital gain is only assessable in Country A under the Country A Agreement, subdivision 115-C of the ITAA 1997 has no application.

You are a beneficiary of the Trust and received a distribution. The Country A Agreement does not deal specifically with the assessability of trust distributions. Thus we need to turn to Article 21 of the Country A Agreement entitled 'Other income'. The Trust made a gain as a result of the sale of the property. According to Article 21, where a resident of Australia for tax purposes receives a distribution from a Country A trust, the distribution may be assessed in Australia.

There are a number of Australian income tax provisions that may make the distribution from the Trust assessable to you. One of the provisions is contained in section 99B of the ITAA 1936.

Subsection 99B(1) of the ITAA 1936 provides that where, during a year of income, a beneficiary who was a resident at any time during the year is paid a distribution from a trust, or has an amount of trust property applied for their benefit, that amount is to be included in the assessable income of the beneficiary.

Subsection 99B(2) of the ITAA 1936 modifies the rule in subsection 99B(1) of the ITAA 1936 and has the effect that the amount to be included in assessable income under subsection (1) is not to include any amount that represents:

(a) corpus of the trust, but an amount will not be taken to represent corpus to the extent that it is attributable to income derived by the trust which would have been subject to tax had it been derived by a resident taxpayer;

(b) amounts that would not be included in assessable income of a resident taxpayer if they had been derived by that taxpayer;

(c) amounts that have been or will be included in the assessable income of the beneficiary under section 97 of the ITAA 1936 or have been liable to tax in the hands of the trustee under sections 98, 99 or 99A of the ITAA 1936; or

(d) amounts included in assessable income under section 102AAZD of the ITAA 1936.

You have received a distribution of proceeds from the Trust which includes the gain or profit from the sale of the property in Country A.

Under section 99B of the ITAA 1936, if the capital gain had been derived by a resident taxpayer it would be subject to tax, as residents are required to include capital gains or capital losses from all sources in the calculation of their net capital gain for a year of income. Thus you will have an assessable amount.

In view of Article 13 of the Country A, Agreement, the capital gain is calculated in accordance with the CGT provisions in the ITAA 1997, regardless of how it may be calculated in Country A.

If the Trust had have been an Australian resident the 50% discount would have been applicable under section 115-25 of the ITAA 1997 as the asset in question (property) was acquired by the Trust at least 12 months before the CGT event, being the disposal of the property. Thus you can reduce the assessable amount by 50%.