Edited version of your written advice

Authorisation Number: 1013110066539

Date of advice: 24 October 2016

Ruling

Subject: Lump sum payment from a foreign fund.

Question 1

Was your client's interest in the foreign fund a pre capital gains tax (CGT) asset?

Answer

Yes.

Question 2

Will any CGT consequences, in relation to your client's interest in the foreign fund, be disregarded when they ceased to be a resident in the 20YY-YY financial year?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20YY

Year ended 30 June 20YY

The scheme commences on:

1 July 20YY

Relevant facts and circumstances

Your Client became an Australian resident in the 200Y-0Y financial year.

Your Client remained an Australian resident until late 20YY when they relocated overseas.

Your Client ceased to be an Australian resident in late 20YY and was not a resident at any time during the 20YY-YY financial year.

Your Client is a citizen of another country and worked for a company for more than XX years until such time when the employer ceased to exist.

Your Client was a member of a foreign fund (the Fund), established more than XX years ago.

Several years ago the trustees of the Fund resolved that the Fund would be governed by substituted rules (the Rules).

Under the Rules of the Fund, the Fund provides retirement and death benefits, as well as other benefits (including housing loans and guarantees in respect of housing loans) to its members.

When the employer ceased to exist, the Rules of the Fund provided that the Fund would not accept any new members, or any member or employer contributions, from the time it ceased to exist.

Each member of the Fund became a deferred beneficiary from the date of cessation, until such time as a condition of release is satisfied.

The Fund is currently managed and the members' benefits preserved, until a condition of release is satisfied. Eventually, the Fund will be wound up when it has no members.

Members of the Fund can elect when to retire from the age of 55. They must give four week's notice of retirement.

Your Client gave notice of retirement in the 20YY-YY financial year, being over 55 years.

Your Client received a lump sum payment from the Fund in the 20YY-YY financial year.

Your Client was not an Australian resident at the time they received the lump sum payment.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Subsection 6-10(4)

Income Tax Assessment Act 1997 Section 10-5

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 855-45

Reasons for decision

Summary

Your Client's interest in the Fund is a pre capital gains tax (CGT) asset. The changes made to the Fund did not result in a resettlement of the trust.

As Your Client's interest in the Fund is a pre CGT asset and there was a disposal when they ceased to be an Australian resident, any capital gain (or loss) is disregarded.

Detailed reasoning

Question 1

Trust resettlement

A trust resettlement will occur for income tax purposes where one trust estate has ended and another has replaced it. The effect of such a resettlement is that a disposal of the trust assets is deemed to occur. In consequence, capital gains could accrue to beneficiaries as a result of various CGT events.

The Commissioner of Taxation has recently released Taxation Determination TD2012/21 (TD 2012/21) entitled Income tax: does CGT event E1 or E2 in sections 104-55 or 104-60 of the Income Tax Assessment Act 1997 happen if the terms of a trust are changed pursuant to a valid exercise of a power contained within the trust's constituent document, or varied with the approval of a relevant court, published as a result of a recent court case CoT v Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550 (Clark's case). Whilst Clark's case dealt with whether changes in a continuing trust were sufficient to treat that trust as a different taxpayer for the purpose of applying relevant losses, TD 2012/21 accepts that the principles set out in Clark's case have broader application.

TD 2012/21 states that a valid amendment to a trust pursuant to an existing power will not result in termination of the trust unless:

● the change causes the existing trust to terminate and a new trust to arise for trust law purposes; or

● the effect of the change or court approved variation is such as to lead to a particular asset being subject to a separate charter of rights and obligations such as to give rise to the conclusion that that asset has been settled on terms of a different trust.

Becoming an Australian resident

Section 855-45 of the ITAA 1997 considers CGT and individuals who become Australian residents. The rules in this section do not apply to an asset that was acquired prior to 20 September 1985.

Application to Your Client's circumstances

Your Client acquired an interest in the Fund prior to 1985. We accept that this interest was a CGT asset of Your Client's. We do not consider that the changes made to the Fund caused the Fund to terminate or gave rise to a different trust. Following the Commissioner's view set out in TD 2012/21, we consider that the changes made to the Fund would not have resulted in a resettlement. Accordingly, Your Client's interest in the Fund remains a pre CGT asset and the rules in section 855-45 of the ITAA 1997 will have no application in Your Client's circumstances.

Question 2

If you ceased being an Australian resident, for CGT purposes, you are taken to have disposed of each asset that is not taxable Australian property for its market value at the time you ceased being a resident.

Taxable Australian property includes:

● a direct interest in real property situated in Australia;

● a mining, quarrying or prospecting right to minerals, petroleum or quarry materials situated in Australia;

● a capital gains tax (CGT) asset that you have used at any time in carrying on a business through a permanent establishment in Australia;

● an indirect interest in Australian real property - you and your associates hold 10% or more of an entity including a foreign entity, and the value of your interest is principally attributable to Australian real property.

Taxable Australian property also includes an option or right over one of the above.

CGT event C2

Under section 108-5 of the ITAA 1997 an asset for CGT purposes is any form of property or a legal or equitable right that is not property. Under section 102-20 of the ITAA 1997 you make a capital gain or capital loss as a result of a CGT event.

Section 104-25 of the ITAA 1997 provides that CGT event C2 happens if the ownership of an intangible CGT asset ends by the asset:

(a) being redeemed or cancelled; or

(b) being released, discharged or satisfied; or

(c) expiring; or

(d) being abandoned, surrendered or forfeited.

The time of the event is when you enter into the contract that results in the asset ending, or if there is no contract, when the asset ends.

Under subsection 104-25(5) of the ITAA 1997 a capital gain or loss you make from CGT event C2 is disregarded if you acquired the asset before 20 September 1985.

Application to Your Client's circumstances

In this case, the interest Your Client held in the Fund was not taxable Australian property. As discussed in question 1, we consider Your Client's interest in the Fund to be a pre CGT asset. Therefore, while Your Client is taken to have disposed of it for market value when they ceased to be an Australian resident, any capital gain (or loss) is disregarded.