Edited version of your written advice

Authorisation Number: 1013105191072

Date of advice: 21 October 2016

Ruling

Subject: Trust-capital gains tax-non-resident beneficiary

Question 1:

Is the Trust a 'fixed trust' for the purposes of section 272-65 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) and subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes.

Question 2

Can the non-resident beneficiary disregard a capital gain made from a CGT event happening in respect of their interests in a fixed trust under section 855-40 of the ITAA 1997?

Answer:

Yes.

This ruling applies for the following periods:

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2019

Year ending 30 June 2020

The scheme commenced on:

1 July 2013

Relevant facts and circumstances

Z was involved in an accident and received multiple injuries as a child.

A court awarded Z $ an amount in damages for injuries sustained as a result of the accident.

A trustee was appointed as administrator pursuant to Public Trustee Act 1978 and The Guardianship & Administration Act 2000 in relation to all financial matters relating to the sum paid.

The Trustee has provided a copy of the court order and at clause X the Trustee shall hold the trust sum in trust for the plaintiff absolutely and apply it and the income therefrom in such a manner as it thinks fit for the maintenance and benefit of the plaintiff.

Under clause XX of the court order the administrator has the power to invest for and on behalf of the plaintiff pursuant to section 80 of the Public Trustee Act 1978 and thereafter section 51 of The Guardian & Administration Act 2000.

The Trustee has invested funds within the trust and applied the funds where appropriate to the benefit and maintenance of Z.

The investments are various listed equities on the Australian share market and unit trust managed funds.

Z has attained their majority at 18 years of age. As such they now have the opportunity, subject to a normal assessment process, to gain full and complete access/ownership of the trust funds held and for the Trust account to be terminated.

Z moved overseas and is a non-resident for Australian taxation purposes.

The Trustee advised there are no other trust deeds or orders in respect of Z.

Relevant legislative provisions

Income Tax Assessment Act 1936 Schedule 2F

Income Tax Assessment Act 1936 Section 272-5 of Schedule 2F

Income Tax Assessment Act 1936 Subsection 272-5(1) of Schedule 2F

Income Tax Assessment Act 1936 Section 272-65 of Schedule 2F

Income Tax Assessment Act 1997 Section 855-40

Income Tax Assessment Act 1997 Subsection 855-40(2)

Income Tax Assessment Act 1997 Subsection 855-40(3)

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

Fixed Trust

Section 272-65 of Schedule 2F to the ITAA 1936 provides that a trust is a 'fixed trust' if persons have fixed entitlements to all of the income and capital of the trust. Subsection 995-1(1) of the ITAA 1997 provides that a trust is a fixed trust if entities have fixed entitlements to all of the income and capital of the trust.

Subsection 272-5(1) of Schedule 2F to the ITAA 1936 provides that, in relation to the meaning of the term fixed entitlement:

If, under a trust instrument, a beneficiary has a vested and indefeasible interest in a share of income of the trust that the trust derives from time to time, or of the capital of the trust, the beneficiary has a fixed entitlement to that share of the income or capital.

It is an essential element of subsection 272-5(1) that in order to have a fixed entitlement to a share of income or capital there must be a vested or indefeasible interest 'under a trust instrument'. In all cases, the determining factor in deciding if fixed entitlements exist will be the terms of the trust instrument under which the trust is constituted. Neither the form of the trust nor the labels that are attached to it can determine this question.

The meaning of the term 'vested and infeasible' (in the context of the Schedule 2F) has not been judicially considered. However, the term appears in Division 6 in subsection 95A(2) of the ITAA 1936 and in the context of that subsection, the term has been considered by the courts; for example, refer to Estate Mortgage Fighting Fund Trust v FC of T 2000 ATC 4,525; Walsh Bay Developments Pty Ltd v Commissioner of Taxation (1995) 95 ATC 4378; Dwight v Commissioner of Taxation (1992) 92 ATC 4192; Harmer v FC of T (1991) 91 ATC 5000.

Also relevant are MSP Nominees Pty Ltd v Commissioner of Stamps (SA) (1999) 198 CLR 494; 99 ATC 4937; Queensland Trustees Ltd v Commissioner of Stamp Duties (1952) 88 CLR 54; and Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490.

The term 'vested and indefeasible' is not defined in the taxation legislation and to date there is no 'ATO view' which defines or clarifies the term.

The Explanatory Memorandum (EM) to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 which introduced the trust loss measures gives an explanation in relation to the meaning of 'vested and indefeasible' interest (see paragraphs 13.3 to 13.9).

What is a vested interest?

The EM states:

13.4 A person has a vested interest in something if the person has a present right relating to the thing. Stated simply, a vested interest is one that is bound to take effect in possession at some point in time. A vested interest is to be contrasted with a 'contingent' interest which may never fall into possession. If an interest of a beneficiary in income or capital is the subject of a condition precedent, so that an event must occur before the interest becomes vested, the beneficiary does not have a vested interest to the income or capital since such an interest is instead 'contingent' upon the event occurring.

13.5 In traditional legal analysis, a person can be said to be either 'vested in possession' or 'vested in interest'. A present interest, i.e. one that is being enjoyed, is said to be 'vested in possession'; a future interest, i.e. one which gives its holder a present right to future enjoyment, is said to be 'vested in interest'. A person is vested in possession where the person has a right to immediate possession or enjoyment of the thing in question. In the definition of fixed entitlement, 'vested' includes both vested in possession and vested in interest.

13.6 Because vested interests include future interests, a person can have a vested interest in a thing even though the person's actual possession and enjoyment of the thing is delayed until sometime in the future.

When is a vested interest indefeasible?

The EM states:

13.7 A vested interest is indefeasible where, in effect, it is not able to be lost. A vested interest is defeasible where it is subject to a condition subsequent that may lead to the entitlement being divested. A condition subsequent is an event that could occur after the interest is vested that would result in the entitlement being defeated, for example, on the occurrence of an event or the exercise of a power. For example, where a beneficiary's vested interest is able to be taken away by the exercise of a power by the trustee or any other person, the interest will not be a fixed entitlement.

13.8 Where the trustee exercises a power to accumulate income or capital of the trust in accordance with the trust deed, the accumulation does not result in a beneficiary's interest being taken away or defeased as long as the beneficiary nevertheless remains entitled at some future time to enjoy his or her share of the income or capital which has been accumulated.

Do vested and indefeasible interests exist in the income and capital of the Trust?

In relation to the income and capital of the Trust, Z is the only beneficiary of the Trust. As provided for in the Court Order, Z is able to take possession of their interests in the income and capital of the Trust albeit in such a manner as the Trustee thinks fit for their maintenance and benefit.

By the provisions of the Court Order, the Trust cannot be vested until Z attains the age of majority.

By the time Z attained their majority at 18 years of age, the existing contingency was removed. As such the Trust can now be vested and the trust fund will be distributed 100% to Z being the only beneficiary of the Trust.

There is no existing condition in the trust instrument, the Court Order, by which the only beneficiary Z could lose their interest in the Trust. Therefore the beneficiary has a vested and indefeasible interest in the income and capital of the Trust.

CGT exemption in section 855-40 of the ITAA 1997

Section 855-40 of the ITAA 1997 provides a CGT exemption for foreign residents making a capital gain in respect of their interest in a fixed trust (including a managed fund).

Relevantly, subsection 855-40(2) of the ITAA 1997 provides that a capital gain you make in respect of your interest in a fixed trust is disregarded if:

• you are a foreign resident when you make the gain: paragraph 855-40(2)(a) of the ITAA 1997; and

• the gain is attributable to a CGT event happening to a CGT asset of a trust (the CGT event trust) that is the fixed trust: subparagraph 855-40(2)(b)(i) of the ITAA 1997; and

• the asset is not taxable Australian property for the CGT event trust at the time of the CGT event: subparagraph 855-40(2)(c)(i) of the ITAA 1997.

In the present case, the relevant conditions in subsection 855-40(2) of the ITAA 1997 will be satisfied in respect of the interests of Z (sole beneficiary) in the Trust where Z is a non-resident of Australia for taxation purposes when they make the capital gain attributable to the CGT event trust that is a fixed trust. It is noted Z's interest in the Australian resident trust falls outside the definition of taxable Australian property in section 855-15 of the ITAA 1997.

Conclusion

Given that the interests of the only beneficiary, Z, in the income and capital of the Trust are vested and indefeasible, it is concluded that fixed entitlements exist in accordance with subsection 272-5(1) of Schedule 2F to the ITAA 1936. As such the Trust is a fixed trust in accordance with section 272-65 of Schedule 2F to the ITAA 1936 and subsection 995-1(1) of the ITAA 1997.

Because the Trust is a fixed trust, Z, the non-resident beneficiary can disregard the capital gain made in respect of their interest in the Trust under subsection 855-40(2) of the ITAA 1997.

Subsection 855-40(3) of the ITAA 1997 provides that a Trustee is not liable to pay tax in respect of an amount to the extent that the amount gives rise to a capital gain that is disregarded for a beneficiary under subsection 855-40(2) of the ITAA 1997. As such, to the extent that the amount relates to the capital gain that is disregarded by the non-resident beneficiary under subsection 855-40(2) of the ITAA 1997, the Trustee is not liable to pay tax in respect of that amount.