Edited version of private advice

Authorisation Number: 1051579226753

Date of advice: 19 September 2019

Ruling

Subject: Fixed trusts - CGT exemption - non-resident beneficiaries

Question 1

Is the Estate of X Trust for Y 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) during the ruling period?

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 subsection 855-40(2) of the ITAA 1997?

Answer

Yes

Question 3

Is the Trustee of a fixed trust 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?

Answer

No

This ruling applies for the following period:

Year ended 30 June XXXX

The scheme commences on:

1 July XXX

Relevant facts and circumstances

X died in March XXXX. The Will of X and Codicil to the Will, together referred to as the Will, was granted Probate by the Court in November XXXX.

The Estate of X Trust for Y (the Trust) is a testamentary trust which was established under the Will representing the share in X's residuary estate for their child Y.

The trustee of the Trust is Company A.

A clause in the Will created a life interest for Y where it provided that the Trustee of the Trust would invest the trust fund and pay the income of such investments to Y for life.

A clause in the Will created a remainder interest for the children of Y where it provided that the Trustee would hold the income and capital of the Trust for the benefit of the children of Y who are living at the time of X's death and have attained a certain age.

Y died in July XXXX. At that time Y's life interest in the Trust ended. The Trustee confirmed the Trust would vest upon the ending of the life interest of Y.

B is the only child of Y and is the remainder beneficiary of the Trust.

B was born in June XXXX and they attained a certain age when their parent (Y) died. Therefore the conditions in the Will are satisfied because:

·        B was living at the time of X's death in March XXXX; and

·        B attained a certain aged when Y died in July XXXX.

B was born in the Country A and has never resided in Australia. As such they are a non-resident of Australia for taxation purposes.

The assets of the Trust at the time of Y's death consisted of listed equities and unlisted managed funds.

Relevant legislative provisions

Income Tax Assessment Act 1936

Schedule 2F

Subsection 272-5(1)

Section 272-65

Income Tax Assessment Act 1997

Subsection 995-1(1)

Section 855-40

Subsection 855-40(2)

Subsection 855-40(3)

Reasons for decision

Question 1

Summary

As the interest of the remainder beneficiary in the income and capital of The Estate of X Trust for Y (the Trust) is vested and indefeasible, fixed entitlement exists in accordance with subsection 272-5(1) of Schedule 2F to the ITAA 1936. Therefore, the Trust is a fixed trust under section 272-65 of Schedule 2F to the ITAA 1936 and subsection 995-1(1) of the ITAA 1997 following the death of Y.

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.

A beneficiary will have a fixed entitlement to a share of the income or capital of the trust if, under a trust instrument, their interest in the income or capital is vested and indefeasible - subsection 272-5(1) of Schedule 2F to the ITAA 1936.

Vested and indefeasible interests

Practical Compliance Guidelines PCG 2016/16 explains at paragraphs 13 and 15:

In terms of the concept of 'fixed entitlement', an interest is 'vested' if it is vested in interest or vested in possession. An interest is vested in possession when it gives its holder a right of present enjoyment, whereas an interest is vested in interest if it gives its holder a present right to future enjoyment.

An interest is defeasible if it can be defeated by the actions of one or more persons or by the occurrence of one or more subsequent events.

When is a vested interest indefeasible?

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

Vested and indefeasible interests and deceased estates

ATO Interpretative Decision ATO ID 2006/279 expresses the view that the terms of the Will governing the disposition of the property in the deceased estate confer fixed entitlements to all of the income and capital of the estate upon the residuary beneficiaries. The ATO ID explains that the interest of the residuary beneficiaries in the income and capital of the estate is indefeasible. There is no condition in the trust instrument, the Will (and Codicil to the Will), by which any of the residuary beneficiaries could lose their interest in the estate.

In relation to vesting, it is considered that for any interest to be 'vested in interest', the following conditions are present (Evans, M Equity & Trusts, Sydney: Butterworths 2003 at 354):

a)     The person or persons entitled to the interest must be ascertained;

b)     The interest must be ready to take effect in possession immediately upon termination of the prior interest;

c)     The gift must not be subject to any contingency; and

d)     Where the gift is in favour of a class, every member of the class must be ascertained (that is, identified), and the exact share of each member must also be ascertained.

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

In relation to the income and capital of the Trust:

a)     The beneficiary entitled to both the income and capital of the Trust is B being the only child of Y born in June XXXX and had attained a certain age.

b)     B is ready to take possession of the income and capital of the Trust following the death of Y marking the end of their life interest in the Trust as provided in the Will.

c)     There are no contingencies as the conditions in the Will are all satisfied by the time Y died.

d)     B being the only child of Y is the sole beneficiary entitled to a share of the income and capital of the Trust pursuant to the Will.

There are no conditions subsequent or any indication that anything external to the Will that would have the effect of a condition subsequent in relation to the income and capital of the Trust, by which the beneficiary could lose their interests in the Trust.

Therefore the remainder beneficiary has a vested and indefeasible interest in the income and capital of the Trust.

Conclusion

As the interest of the remainder beneficiary in the income and capital of The Estate of X Trust for Y (the Trust) is vested and indefeasible, fixed entitlement exists in accordance with subsection 272-5(1) of Schedule 2F to the ITAA 1936. Therefore the Trust is a fixed trust under section 272-65 of Schedule 2F to the ITAA 1936 and subsection 995-1(1) of the ITAA 1997 following the death of Y.

This conclusion is consistent with the view expressed in ATO ID 2006/279.

Question 2

Summary

Given that The Estate of X Trust for Y is a fixed trust, B, the non-resident beneficiary of the Trust can disregard any capital gain he makes in respect of their interest in the Trust under subsection 855-40(2) of the ITAA 1997.

Detailed reasoning

CGT exemption for fixed trusts

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) 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); 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); 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).

The relevant conditions in subsection 855-40(2) are satisfied in respect of the interests of B (remainder beneficiary) in the Trust.

This is because B is a non-resident of Australia for tax purposes when they make the capital gain attributable to the CGT event trust that is a fixed trust and the assets held by the Trustee in the Trust are not taxable Australian property for the purposes of Division 855 of the ITAA 1997. Also the interest of B in the Trust, which is an Australian resident trust, falls outside the definition of taxable Australian property in section 855-15 of the ITAA 1997.

Conclusion

Therefore given that The Estate of X Trust for Y is a fixed trust, B, the non-resident beneficiary of the Trust can disregard any capital gain they make in respect of their interest in the Trust under subsection 855-40(2) of the ITAA 1997.

Question 3

Summary

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 pursuant to subsection 855-40(3).

Detailed reasoning

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.

In this case, the non-resident beneficiary B, can disregard any capital gain he makes in respect of their interest in The Estate of X Trust for Y because the Trust is a fixed trust and all the relevant conditions in subsection 855-40(2) are satisfied.

Conclusion

Therefore, 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 pursuant to subsection 855-40(3).