Edited version of your written advice

Authorisation Number: 1013106702524

Date of advice: 13 October 2016

Ruling

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

Questions

Is the Estate of the Deceased (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

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 period:

Year ended 30 June 2016

The scheme commenced on:

1 July 2015

Relevant facts and circumstances

The deceased died on XXXX.

The Will of deceased was granted probate shortly after the deceased death.

The deceased had a number of children at the date of their death.

One child now an adult resides overseas and is a non-resident of Australia for taxation purposes.

A Clause of the Will further provides that on the death of the deceased spouse, the children of the deceased are the remainder beneficiaries where the trust fund will be divided and distributed equally between the children.

The Trustee has confirmed that the shares and units held by the Trust are not taxable Australian property for the purposes of Division 855 of the ITAA 1997.

The Trustee has confirmed there was no codicil to the Will or any other will of the deceased.

Relevant legislative provisions

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 Subsection 855-10(1)

Income Tax Assessment Act 1997 Section 855-15

Income Tax Assessment Act 1997 Section 855-40

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

Income Tax Assessment Act 1997 Paragraph 855-40(2)(a)

Income Tax Assessment Act 1997 Subparagraph 855-40(2)(b)(i)

Income Tax Assessment Act 1997 subparagraph 855-40(2)(c)(i).

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

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

Reasons for decision

Summary

Given that the interests of the residuary beneficiaries 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, the non-resident beneficiary can disregard the capital gain made in respect of her 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.

Detailed reasoning

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 the following 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) of Schedule 2F to the ITAA 1936 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.

To determine if the beneficiaries have a fixed entitlement, it must be determined if they have a "vested and indefeasible interest". This term is not defined in tax legislation. The ordinary meaning can therefore be applied. Paragraphs 13.3 to 13.9 of the Explanatory Memorandum to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 reflects what this meaning may be. A "vested interest" means an individual has a present right to something, and "vested indefeasible interest" means that right cannot be lost.

In this case, it is accepted that the Will provides the residuary beneficiaries with a vested interest in the income and capital of the estate of the deceased. They take possession of their interests upon the death of the deceased's spouse.

There is no condition in the trust instrument, the Will, by which the residuary beneficiaries could lose their interest in the estate.

Since the residuary beneficiaries have a vested and indefeasible interest in a share of the income and capital of the estate, they have a fixed entitlement to a share of the income and capital of the estate, in accordance with subsection 272-5(1) of Schedule 2F to the ITAA 1936

Therefore, the trust founded by the Will of the deceased is a fixed trust under section 272-65 of Schedule 2F of the ITAA 1936.

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).

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, all requirements of subsection 855-40(2) of the ITAA 1997 have been met. Therefore the capital gain of the non resident beneficiary can be disregarded as their interest in the Australian resident trust falls outside the definition of taxable Australian property in section 855-15 of the ITAA 1997.

Further, subsection 855-40(3) of the ITAA 1997 provides that as a Trustee of a Trust you are not liable where the capital gain has been disregarded for the beneficiary under subsection 855-40(2) of the ITAA 1997.

Accordingly, the Trustee is not liable for any tax payable arising from a CGT event occurring.