Edited version of private advice

Authorisation Number: 1051622191307

Date of advice: 26 February 2020

Ruling

Subject: Transfer of assets of a trust to another trust

Question 1

Is Trust X a resident trust for CGT purposes under subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Will the Proposed Arrangement (as defined in the Relevant facts and circumstances) trigger a CGT event under Division 104 of the ITAA 1997?

Answer

Yes

Question 3

Will Trust Y (as defined in the Relevant facts and circumstances) be a resident trust for CGT purposes under subsection 995-1(1) of the ITAA 1997?

Answer

No

Question 4(a)

In circumstances where Trust Y is not a beneficiary of the Trust X, could Trust Y be specifically entitled under subsection 115-228(1) of the ITAA 1997 to an amount of a capital gain made by the Trust X from the Proposed Arrangement?

Answer

No

Question 4(b)

If Trust Y is able to be made a beneficiary of the Trust X, could Trust Y be specifically entitled under subsection 115-228(1) of the ITAA 1997 to an amount of a capital gain made by Trust X from the Proposed Arrangement?

Answer

Yes

Question 4(c)

In the circumstances of Question 4(b), would the trustees of the Trust X be assessed and liable to pay tax under subsection 98(4) of the Income Tax Assessment Act 1936 (ITAA 1936) by the operation of section 115-220 of the ITAA 1997 in respect of an amount of the capital gain to which the Trust Y has been made specifically entitled?

Answer

Yes

Question 4(d)

In the circumstances of Question 4(c), is the source concept in Division 6 of Part III of the ITAA 1936 (being the limitation in Division 6 on the assessment of non-residents (or trustees) to amounts 'attributable to sources in Australia') relevant to the assessability of the trustees of Trust X?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Trust X

By deed dated 19XX, the Trust X was established between J as the Settlor, and J and K as the Trustees. Trust X is a discretionary trust settled overseas and not a unit trust for the purposes of the definition of 'resident trust for CGT purposes' in subsection 995-1(1) of the ITAA 1997 and CGT events E2, E5 and E7.

Other than the Deed of Appointment of Additional Trustee, no other variations or amendments have been made to Trust's X Deed since it was created. There is no express power for the Trustees of Trust X to appoint new beneficiaries, and the deed does not provide power for the Trustees to vary the Trust Deed.

The Trustees of the Trust X

The only trustees of Trust X for the income year ended 30 June 20XX are J and K who are both Australian residents for Australian income tax purposes.

Clause # of the Trust X Deed provides that J is the Appointor and has statutory powers to appoint an additional trustee/s of Trust X or to remove a trustee/s.

The Beneficiaries of the Trust X

The beneficiaries are:

·         'The Final Beneficiaries': Clause # of Trust X Deed provides that 'The Final Beneficiaries' shall mean the children of J (the Settlor) namely, together with any future children or the issue of any of them born before the Vesting Day.

·         'The Discretionary Beneficiaries': Clause # of Trust X Deed provides that 'The Discretionary Beneficiaries' shall mean the spouse of J and the final beneficiaries.

Trust Y is not a Final Beneficiary or a Discretionary Beneficiary of Trust X.

The children of the J (the Settlor), are all residents of Australia for Australian income tax purposes.

The assets of Trust X

Trust X holds the overseas property / assets all located overseas.

The Proposed Arrangement

Under the proposed arrangement (Proposed Arrangement), the following events will all occur in the 20XX income year in this order:

    (i)        the trustee of Trust Y will be incorporated overseas,

   (ii)        Trust Y will be created,

  (iii)        Trust X will transfer all of the overseas assets to the trustee of Trust Y for no consideration, and

  (iv)        Trust X will be wound up.

Trust Y - overseas trust

Trust Y provided a draft deed of the trust.

Trust Y will be a discretionary trust and will be settled overseas.

The trustee of Trust Y will be an overseas entity named Q.

The draft deed of Trust Y provides:

·         Settlors: means L (J's parent), J and K

·         Trustee and Appointor: means Z

·         Principal Beneficiaries: means J and K

·         Primary Beneficiaries: means the Principal Beneficiaries (J and K) and the spouse, widow, widower, children, grandchildren and great-grandchildren of a Principal Beneficiary

·         Secondary Beneficiaries: means -

(a)  parents and brothers and sisters of a Principal beneficiary and of a Principal Beneficiary's spouse or widow or widower and the children, grandchildren and great-grandchildren of those brothers and sisters,

(b)  the spouse, widow or widower of any Primary Beneficiaries and the spouse or widow of any Secondary Beneficiaries described in paragraph (a) above.

·         Final beneficiaries: means the Primary Beneficiaries

·         Beneficiary: any person who receives or may receive any interest in the trust fund

·         Discretionary Beneficiaries means:

(a)  the Primary Beneficiaries

(b)  the Secondary Beneficiaries

(c)  the Final Beneficiaries, and

(d)  any person appointed pursuant to clause # but does not include any person who has been removed from the class of Discretionary Beneficiaries pursuant to clause #.

Z - The overseas company

Z will be incorporated as a private company overseas. The only shareholding of Z will be 100 shares with J and K holding 50 shares each.

Z will not be a resident of Australia for Australian income tax purposes at any time during the income year ended 30 June 20XX.

The only director of Z will be and overseas resident and will not be a resident of Australia for Australian income tax purposes at any time during the income year ended 30 June 20XX.

J may attend the director's meetings of Z from time to time in person, as J is likely to be overseas regularly for personal and business reasons.

Assumptions

For the entire period of the income year ended 30 June 20XX, the central management and control of Trust Y will be conducted by Z in the following manner:

·         Z will make all decisions concerning the control, direction and management of Trust Y (including investment strategies and the types of dealings and transactions Z will enter into as trustee of Trust Y),

·         Z will make all financial decisions of Trust Y (including investment decisions), and

·         Z will make all decisions concerning the future of Trust Y.

For the entire period of the income year ended 30 June 20XX, all decisions and activities in relation to the central management and control of Trust Y to be conducted by Z as identified in Assumption 1 will be made and undertaken by the sole director of Z overseas only.

For the entire period of the income year ended 30 June 20XX, the central management and control of Z will be conducted in the following manner:

·         the director will be making all the strategic and high level decisions of the company in their office overseas via a director's meeting,

·         the director will determine the transactions which the company will enter into,

·         the director will create policy for the company,

·         the director will make decisions concerning the future of the company, and

·         the director will make all decisions about the management of the company.

For the entire period of the income year ended 30 June 20XX, all the decisions and activities to be made and undertaken by the director as identified in Assumption 3 will occur overseas only.

For the entire period of the income year ended 30 June 20XX, neither Z nor the director of Z will conduct any activities in Australia.

For the entire period of the income year ended 30 June 20XX, all directors' meetings of Z will take place overseas only.

For the entire period of the income year ended 30 June 20XX, J will not influence, dictate or control any decisions made by the director of Z, nor will the director of Z be accustomed to act in accordance with J's instructions.

The draft trust deed for Trust Y provided to the ATO will be executed unchanged and no changes will be made to the deed during the Ruling Period.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1936 section 95

Income Tax Assessment Act 1936 section 98

Income Tax Assessment Act 1936 section 98(3)(b)

Income Tax Assessment Act 1936 section 98(4)

Income Tax Assessment Act 1936 section 102

Income Tax Assessment Act 1936 section 102-25

Income Tax Assessment Act 1936 section 102-25(1)

Income Tax Assessment Act 1936 Division 6 of Part III

Income Tax Assessment Act 1936 Subdivision D of Division 6AAA of Part III

Income Tax Assessment Act 1997 section 102-5(1)

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 section 104-75

Income Tax Assessment Act 1997 section 104-85

Income Tax Assessment Act 1997 Subsection 108-5

Income Tax Assessment Act 1997 Subsection 995-1

Income Tax Assessment Act 1997 Subdivision 115-C

Income Tax Assessment Act 1997 section 115-220

Income Tax Assessment Act 1997 section 115-220(2)

Income Tax Assessment Act 1997 section 115-225

Income Tax Assessment Act 1997 section 115-225(1)

Income Tax Assessment Act 1997 section 115-225(2)

Income Tax Assessment Act 1997 section 115-225(3)

Income Tax Assessment Act 1997 section 115-227

Income Tax Assessment Act 1997 Subsection 115-228

Income Tax Assessment Act 1997 Subsection 115-228(1)

Income Tax Assessment Act 1997 Division 128

Income Tax Assessment Act 1997 Subsection 995-1

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

Reasons for decision

Question 1

Is Trust X a resident trust for CGT purposes under subsection 995-1(1) of the ITAA 1997?

Answer: Yes

Summary

Trust X will be a resident trust for CGT purposes under subsection 995-1(1) of the ITAA 1997 because it is not a unit trust, and its trustees are Australian residents.

Detailed reasoning

Subsection 995-1(1) of the ITAA 1997 relevantly defines a resident trust for CGT purposes as follows:

A trust is a resident trust for CGT purposes for an income year if, at any time during the income year:

(a)  for a trust that is not a unit trust, a trustee is an Australian resident or the central management and control of the trust is in Australia; or

(b)  for a unit trust...

Trust X is not a unit trust. The only trustees of Trust X for the income year ended 30 June 20XX are J and K who are both Australian residents for Australian income tax purposes.

As Trust X is not a unit trust, and its trustees are Australian residents, Trust X will be a resident trust for CGT purposes.

Question 2

Will the Proposed Arrangement trigger a CGT event under Division 104 of the ITAA 1997?

Answer: Yes

Summary

The Proposed Arrangement will trigger a CGT event under Division 104 of the ITAA 1997. As Trust Y is not a beneficiary of Trust X (see Detailed reasoning to Question 4(a) below), CGT event E2 will be considered to be the more specific event.

However, if Trust Y is able to be made a beneficiary of Trust X, the Proposed Arrangement will trigger a CGT event under Division 104 of the ITAA 1997, with CGT event E5 or E7 considered to be the more specific event, depending on the form of the resolutions made by the Trustees of Trust X and how the relevant distributions are effected.

Detailed reasoning

Subsection 108-5(1) of the ITAA 1997 defines CGT assets as any kind of property; or a legal or equitable right that is not property. The overseas assets will be CGT assets for the purposes of this definition.

Division 104 of the ITAA 1997 sets out all the CGT events for which you can make a capital gain or loss. There may be different outcomes for a taxpayer depending on which CGT event happens.

Subsection 104-10(1) of the ITAA 1997 provides that CGT event A1 happens if you dispose of a CGT asset. Subsection 104-10(2) of the ITAA 1997 provides that you dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.

Subsection 104-60(1) of the ITAA 1997 provides that CGT event E2 happens if you transfer a CGT asset to an existing trust.

Subsection 104-75(1) of the ITAA 1997 provides that CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 of the ITAA 1997 applies) as against the trustee (disregarding any legal disability the beneficiary is under).

Subsection 104-85(1) of the ITAA 1997 provides that CGT event E7 happens if the trustee of a trust (except a unit trust or a trust to which Division 128 of the ITAA 1997 applies) disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest, or part of it, in the trust capital.

Under the Proposed Arrangement, Trust X will transfer all of the overseas assets to the trustee of Trust Y. As Trust Y is not a beneficiary of Trust X, it is considered that the Proposed Arrangement could trigger CGT event A1 or E2 under Division 104 of the ITAA 1997.

Section 102-25 of the ITAA 1997 sets out the order of application of CGT events. In particular, subsection 102-25(1) of the ITAA 1997 provides that you work out if a CGT event happens to your situation. If more than one event can happen, the one you use is the one that is more specific to your situation.

In these circumstances, it is considered that CGT event E2 is the more specific event.

However, if Trust Y is able to be made a beneficiary of Trust X, it is considered that the Proposed Arrangement could trigger CGT event A1, E2, E5 or E7 under Division 104 of the ITAA 1997.

In those circumstances, it is considered that CGT event E5 or E7 will be the more specific event, depending on the form of the resolutions made by the Trustee and how the relevant distributions are effected.

Question 3

Will Trust Y be a resident trust for CGT purposes under subsection 995-1(1) of the ITAA 1997?

Answer: No.

Summary

Trust Y will not be a resident trust for CGT purposes under subsection 995-1(1) of the ITAA 1997 because it will not be a unit trust, it will not have a trustee that will be an Australian resident, and its central management and control will not be in Australia.

Detailed reasoning

Subsection 995-1(1) of the ITAA 1997 defines a resident trust for CGT purposes as:

A trust is a resident trust for CGT purposes for an income year if, at any time during the income year:

(a)  for a trust that is not a unit trust, a trustee is an Australian resident or the central management and control of the trust is in Australia; or

(b)  for a unit trust ...

Subsection 995-1(1) of the ITAA 1997 defines a foreign trust for CGT purposes as meaning a trust that is not a resident trust for CGT purposes.

Whether the central management and control of a trust is in Australia must be determined by reference to all the facts. Taxation Ruling TR 2018/5 Income tax: central management and control test of residency sets out the Commissioner's view on how to apply the central management and control test of company residency for the purposes of the paragraph (b) definition of 'resident or resident of Australia' in subsection 6(1) of the ITAA 1936. The Commissioner considers some of those principles in TR 2018/5, adapted to the context of a trust, are also relevant to determining the central management and control of a trust for the purposes of determining whether the trust is a resident trust for CGT purposes.

TR 2018/5 provides that central management and control refers to the control and direction of a company's operations. The key element in the control and direction of a company's operations is the making of high-level decisions that set the company's general policies, and determine the direction of its operations and the type of transactions it will enter.

The control and direction of a company is different from the day-to-day conduct and management of its activities and operations. However, the day-to-day conduct and management of a company's operations might be an exercise of central management and control in circumstances where they are effectively the same, for example for a small passive investment company with a very small number of investments.

Identifying who exercises central management and control of a company is a question of fact.The crucial question is who controls and directs a company's operations in reality. Ordinarily it is a company's directors who exercise its central management and control. Merely because a person is a majority shareholder, or has the power to appoint those who control and direct a company's operations does not, by itself, mean the person controls and directs a company's operations and activities.

A company will be controlled and directed where those making its high-level decisions do so as a matter of fact and substance, rather than where they are merely recorded and formalised, or where the company's constitution, bylaws or articles of association require it be controlled and directed, if in reality it occurs elsewhere,

Considering the above principles in the context of a trust, the central management and control of a trust would generally be referring to the strategic and high level decision making processes and activities of the trust (rather than the day-to-day conduct and management of the activities of the trust).While a starting point as to who exercises the central management and control of a trust may be the trustee(s) (and if it is a corporate trustee, the director(s) of the corporate trustee), what must be considered is who in fact performs the high level duties and activities of the trust in practice.The place of the central management and control of a trust is where its strategic and high level decision making occurs.

Trust Y will be a discretionary trust and will be settled overseas. The trustee of Trust Y will be Z which will be incorporated overseas. Z will not be a resident of Australia for Australian income tax purposes at any time during the income year ended 30 June 20XX. The only director of Z will be an overseas resident and will not be a resident of Australia for Australian income tax purposes at any time during the income year ended 30 June 20XX.

On the basis of the Assumptions, for the entire period of the income year ended 30 June 20XX, the central management and control of Trust Y will be conducted by Z in the following manner:

·         Z will make all decisions concerning the control, direction and management of Trust Y (including investment strategies and the types of dealings and transactions Z will enter into as trustee of Trust Y),

·         Z will make all financial decisions of the Trust Y (including investment decisions), and

·         Z will make all decisions concerning the future of Trust Y.

All decisions and activities in relation to the central management and control of Trust Y to be conducted by Z as identified above will be made and undertaken by the sole director of Z only overseas.

The central management and control of the Z will be conducted in the following manner:

·         the director will be making all the strategic and high level decisions of the company overseas via a director's meeting,

·         the director will determine the transaction which the company will enter into,

·         the director will create policy for the company,

·         the director will make decisions concerning the future of the company, and

·         the director will make all decisions about the management of the company.

All the decisions and activities to be made and undertaken by the director as identified above will occur only overseas.

All directors' meetings of Z will take place overseas only. Neither Z nor the director of Z will conduct any activities in Australia. While J, a shareholder in Z, may attend directors meetings overseas, J will not be influencing, controlling or dictating any decisions made by the director of Z, nor will the director be accustomed to act in accordance with J instruction.

Based on the above, the central management and control of Trust Y will not be in Australia.

As Trust Y will not be a unit trust, it will not have a trustee that will be a resident of Australia, and its central management and control will not be in Australia, Trust Y will not be a resident trust for CGT purposes.

Question 4(a)

In circumstances where Trust Y is not a beneficiary of the Trust X, could Trust Y be specifically entitled under subsection 115-228(1) of the ITAA 1997 to an amount of a capital gain made by Trust X from the Proposed Arrangement?

Answer: No

Summary

As Trust Y is not a beneficiary of Trust X, Trust Y could not be specifically entitled under subsection 115-228(1) of the ITAA 1997 to an amount of a capital gain made by Trust X from the Proposed Arrangement.

Detailed reasoning

If a trust estate makes a capital gain, section 115-228 of the ITAA 1997 sets out when a beneficiary will be specifically entitled to an amount of that capital gain made by the trust estate in an income year.

Subsection 115-228(1) of the ITAA 1997 provides as follows:

(1) A beneficiary of a trust estate is specifically entitled to an amount of a capital gain made by the trust estate in an income year equal to the amount calculated under the following formula:

Capital gain x Share of net financial benefit

       Net financial benefit

Where: ...

(emphasis added)

Trust Y is not a beneficiary of Trust X.It is not a 'Final Beneficiary' or a 'Discretionary Beneficiary' of Trust X, nor is there a power under the Trust X Deed to expand the class of beneficiaries to include Trust Y as a beneficiary. Therefore, Trust Y could not be specifically entitled under subsection 115-228(1) of the ITAA 1997 to an amount of a capital gain made by Trust X from the Proposed Arrangement.

Question 4(b)

If Trust Y is able to be made a beneficiary of Trust X, could Trust Y be specifically entitled under subsection 115-228(1) of the ITAA 1997 to an amount of a capital gain made by Trust X from the Proposed Arrangement?

Answer: Yes

Summary

As stated in the Detailed reasoning to Question 4(a), Trust Y is not a beneficiary of Trust X.It is not a 'Final Beneficiary' or a 'Discretionary Beneficiary' of Trust X, nor is there a power under the Trust X Deed to expand the class of beneficiaries to include Trust Y as a beneficiary.

Notwithstanding, if Trust Y is able to be made a beneficiary of Trust X, Trust Y could be specifically entitled under subsection 115-228(1) of the ITAA 1997 to an amount of a capital gain made by Trust X from the Proposed Arrangement.

Detailed reasoning

If a trust estate makes a capital gain, section 115-228 of the ITAA 1997 sets out when a beneficiary will be specifically entitled to an amount of that capital gain made by the trust estate in an income year.

Subsection 115-228(1) of the ITAA 1997 provides as follows:

(1) A beneficiary of a trust estate is specifically entitled to an amount of a capital gain made by the trust estate in an income year equal to the amount calculated under the following formula:

Capital gain x Share of net financial benefit

       Net financial benefit

Where: ...

(emphasis added)

As stated in the Detailed reasoning to Question 4(a), the Trust Y is not a beneficiary of Trust X.It is not a 'Final Beneficiary' or a 'Discretionary Beneficiary' of Trust X, nor is there a power under the Trust X Deed to expand the class of beneficiaries to include Trust Y as a beneficiary.

Notwithstanding, if Trust Y is able to be made a beneficiary of Trust X, Trust Y could be specifically entitled under subsection 115-228(1) of the ITAA 1997 to an amount of a capital gain made by Trust X from the Proposed Arrangement.

Question 4(c)

In the circumstances of Question 4(b), would the trustees of Trust be assessed and liable to pay tax under subsection 98(4) of the ITAA 1936 by the operation of section 115-220 of the ITAA 1997 in respect of an amount of the capital gain to which Trust Y has been made specifically entitled?

Answer: Yes

Summary

In the circumstances of Question 4(b), the trustees of Trust X would be assessed and liable to pay tax under subsection 98(4) of the ITAA 1936 by the operation of section 115-220 of the ITAA 1997 in respect of an amount of the capital gain to which Trust Y has been made specifically entitled.

Detailed reasoning

As Trust X will be a 'resident trust for CGT purposes' under subsection 995-1(1) of the ITAA 1997, any capital gain made by the trustees of Trust X from the Proposed Arrangement would be required to be taken into account in determining its net capital gain which would be included under section 95 of the ITAA 1936 in the net income of the Trust X (TD 2017/23).

Subdivision 115-C of the ITAA 1997 sets out the rules for dealing with the net income of a trust that has a net capital gain.Under section 115-227 of the ITAA 1997, an entity that is a beneficiary of a trust estate has a share of a capital gain that is the sum of the following:

·         the amount of the capital gain to which the entity is specifically entitled; and

·         if there is an amount of the capital gain to which no beneficiary of the trust estate is specifically entitled, and to which the trustee is not specifically entitled - that amount multiplied by the entity's adjusted Division 6 percentage of the income of the trust estate for the relevant income year.

Accordingly, to the extent that Trust Y, as beneficiary, has been made specifically entitled under subsection 115-228(1) of the ITAA 1997 to an amount of the capital gain made by Trust X from the Proposed Arrangement, it will have a share of that capital gain under section 115-227 of the ITAA 1997.

This share of the capital gain under section 115-227 of the ITAA 1997 is relevant to the calculation of attributable gain under section 115-225 of the ITAA 1997.Specifically, subsection 115-225(1) of the ITAA 1997 states the following:

115-225(1) The amount is the product of:

a)    the amount of the *capital gain remaining after applying steps 1 to 4 of the method statement in subsection 102-5(1); and

b)    your *share of the capital gain (see section 115-227), divided by the amount of the capital gain.

This means that Trust Y's attributable gain under section 115-225 of the ITAA 1997 in respect of the capital gain made by Trust X from the Proposed Arrangement (Trust X's Capital Gain) is worked out by reference to the amount of the Trust X Capital Gain remaining after applying steps 1 to 4 of the method statement in subsection 102-5(1) of the ITAA 1997 and the Trust Y's share of the Trust X Capital Gain worked out under section 115-227 of the ITAA 1997.Accordingly, unless the amount of the Trust X Capital Gain remaining after applying steps 1 to 4 of the method statement in subsection 102-5(1) of the ITA 1997 is nil, Trust Y will have an attributable gain under section 115-225 of the ITAA 1997 because it has a share of the Trust X Capital Gain under section 115-227 of the ITAA 1997.

The amount of the attributable gain may be less if the Trust X's net income falls short of the sum of its net capital gains and franked distributions in the 20XX income year such that subsection 115-225(2) of the ITAA 1997 is satisfied and subsection 115-225(3) of the ITAA 1997 is triggered.

Once Trust Y's attributable gain under section 115-225 of the ITAA 1997 is determined, section 115-220 of the ITAA 1997 would be considered. Broadly, section 115-220 of the ITAA 1997 operates to assess a trustee under section 98 of the ITAA 1936 on the trust's capital gains attributed to a non-resident beneficiary. Section 115-220 of the ITAA 1997 provides the following:

(1) This section applies if:

(a) you are the trustee of the trust estate; and

(b) on the assumption that there is a share of the income of the trust to which a beneficiary of the trust is presently entitled, you would be liable to be assessed (and pay tax) under section 98 of the Income Tax Assessment Act 1936 in relation to the trust estate in respect of the beneficiary.

(2) For each *capital gain of the trust estate, increase the amount (the assessable amount ) in respect of which you are actually liable to be assessed (and pay tax) under section 98 of the Income Tax Assessment Act 1936 in relation to the trust estate in respect of the beneficiary by:

(a) unless paragraph (b) applies - the amount mentioned in subsection 115-225(1) in relation to the beneficiary; or

(b) if the liability is under paragraph 98(3)(b) or subsection 98(4), and the capital gain was reduced under step 3 of the method statement in subsection 102-5(1) (discount capital gains) - twice the amount mentioned in subsection 115-225(1) in relation to the beneficiary.

(3) To avoid doubt, increase the assessable amount under subsection (2) even if the assessable amount is nil.

Where a beneficiary is a non-resident at the end of the year of income, section 115-220 of the ITAA 1997 increases the amount on which the trustee is liable to be assessed and pay tax under section 98 of the ITAA 1936 by either the amount mentioned in subsection 115-225(1) of the ITAA 1997; or if the liability is under subsections 98(3)(b) or (4) of the ITAA 1936 and the capital gain is a discount capital gain, by twice the amount mentioned in subsection 115-225(1) of the ITAA 1997.

Accordingly, as Z, as trustee of Trust Y, will be a non-resident at the end of the income year ended 30 June 20XX, and Trust Y has an attributable gain under section 115-225, subsection 115-220(2) of the ITAA 1997 will increase the amount the trustees of Trust X is to be assessed and liable to pay tax under subsection 98(4) of the ITAA 1936 by the relevant amount as specified in that subsection.

Question 4(d)

In the circumstances of Question 4(c), is the source concept in Division 6 of Part III of the ITAA 1936 (being the limitation in Division 6 on the assessment of non-residents (or trustees) to amounts 'attributable to sources in Australia') relevant to the assessability of the trustees of Trust X?

Answer: No

Summary

In the circumstances of Question 4(c), the source concept in Division 6 of Part III of the ITAA 1936 is not relevant to the assessability of the trustees of Trust X.

Detailed reasoning

Section 115-220 of the ITAA 1997 does not test whether the beneficiary's attributable gain satisfies the conditions in section 98 of the ITAA 1936. Rather, it increases the amount assessable to the trustee under section 98 of the ITAA 1997 without regard to those conditions (TD 2017/23).

The effect of section 115-220 of the ITAA 1997 is merely to make the amount drawn from Subdivision 115-C of the ITAA 1997, without regard to source, both assessable and taxable to the trustee under section 98 of the ITAA 1936 (paragraph 15 of TD 2019/D7). In other words, the source concept in Division 6 of Part III of the ITAA 1936 is not relevant in determining whether an amount of a trust capital gain is assessable to the trustees of Trust X.