Edited version of your written advice

Authorisation Number: 1051338594081

Date of advice: 15 February 2018

Ruling

Subject: Fixed trust and Capital gains tax

Question 1

Is the Estate a fixed trust?

Answer

Yes

Question 2

Are the non-resident remainder beneficiaries presently entitled to capital gains after the death of the Estate’s life tenant?

Answer

Yes

Question 3

Can a capital gain that the foreign resident remainder beneficiary is presently entitled to be disregarded?

Answer

Yes

This ruling applies for the following period(s)

Year ended 30 June 2018

The scheme commences on

1 July 2017

Relevant facts and circumstances

The deceased passed away in 199X.

Under the deceased’s Will a life tenancy was created.

The deceased was an Australian tax resident at date of death.

The surviving spouse of the deceased became a life tenant of the Estate.

The life tenant passed away in 201X.

The remainder beneficiaries in equal shares as nominated in the Will were the two children of the deceased.

The residuary beneficiaries have both been non-residents for tax purposes since the deceased’s date of death in 199X.

The assets of the Estate consist of equities listed on the ASX and unlisted managed funds.

The assets are not indirect taxable Australian property.

The trust has purchased and sold assets since its establishment.

There is no condition in the Will by which any of the remainder beneficiaries could forfeit their interest in the Estate.

The beneficiaries did not pay for their interest in the Estate.

Legislative References:

Income Tax Assessment Act 1936 Schedule 2F

Income Tax Assessment Act 1936 Section 272-5

Income Tax Assessment Act 1936 Subsection 272-5(1)

Income Tax Assessment Act 1936 Section 272-65

Income Tax Assessment Act 1997 Section 104-215

Income Tax Assessment Act 1997 Subsection 855-10(1)

Income Tax Assessment Act 1997 Section 855-20

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

The trust instrument, for the purpose of subsection 272-5(1) of Schedule 2F of the Income tax Assessment Act 1936 (ITAA 1936), consists of the testamentary trust created under the Will of the deceased.

A fixed trust is defined in subsection 995-1(1) of the Income tax Assessment Act 1997 (ITAA 1997), providing that a trust is a fixed trust if entities have fixed entitlements to all of the income and capital of the trust.

The term ‘fixed entitlement' is then defined in subsection 272-5(1) of Schedule 2F of the ITAA 1936. A fixed entitlement in a trust is where a beneficiary has a vested and indefeasible interest in the income or capital of the trust.

To determine if the foreign 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.

The testamentary trust provides a vested interest for both non-resident beneficiaries in receiving the residuary estate of the deceased's estate.

There is no clause in the Will that would authorise the Trustee to cause the beneficiaries' entitlement to be forfeited.

Since the parties bequeathed within the Will have a vested and indefeasible interest in a share of the residuary estate, they have fixed entitlements in accordance with subsection 272-5(1) of Schedule 2F of the ITAA 1936.

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

Present Entitlement to Capital Gains

Section 128-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that when a person dies, a capital gain or capital loss from a capital gains tax (CGT) event happening to a CGT asset the person owned just before dying is disregarded.

Division 128 applies to assets that form part of a deceased estate. It can also form part of the testamentary trust created if it is the same asset. Assets purchased subsequently by the trustee of the testamentary trust will not fall within Division 128 and would potentially be subject to CGT event E5.

CGT event E5 would occur to the trustee and the beneficiary. The capital gain for the beneficiary would be ignored as they received their asset, being their interest in the Trust for no consideration (section 104-75(6)).

The trustee would be liable for a capital gain which can then be streamed to a beneficiary in accordance with the Trust deed (ATO ID 2013/33). In your circumstances, the beneficiary is presently entitled to a CGT event E5 capital gain.

Therefore Division 855 needs to be analysed to determine whether the capital gain can be disregarded.

Division 855 of the ITAA 1997

Under section 855-40 of the ITAA 1997 a CGT exemption is available where a capital gain or loss is made by a foreign resident on an interest in a fixed trust and that interest is not taxable Australian property.

Specifically, 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;

● 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; and

● the asset is not taxable Australian property for the CGT event trust at the time of the CGT event.

In your case, the gain is being received by a non-resident, the gain itself is attributable to a CGT event happening to a CGT asset of the trust and the trust is a fixed trust based on the analysis in Question 1.

The assets in question are listed Australian securities therefore they would not be considered taxable Australian property as under section 855-20 of the ITAA 1997. They are also not indirect taxable Australian real property interests as under section 855-25 of the ITAA 1997.

All requirements of subsection 855-40(2) of the ITAA 1997 have been met therefore the capital gain of the non-resident beneficiaries can be disregarded.

Additional Comments

Though not considered as part of this ruling, a K3 event can occur when an asset of the estate passes to a non-resident beneficiary. If CGT event K3 occurs and it has not otherwise been disregarded under a provision in the Income Tax Assessment Acts, then any gain or loss made will be included in the deceased’s final tax return.