Edited version of private advice

Authorisation Number: 1051710796963

Date of advice: 8 July 2020

Ruling

Subject: Income tax - assessable income and capital gains tax

Question 1

Would any dividends that may be declared by the Companies be included in your assessable income (in your capacity as trustee, or your personal capacity) under any provisions of the Income Tax Assessment Act 1936 (ITAA 1936) or the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Would any capital gains that may arise from the transfer or disposal of the shares in the Companies be included in your assessable income (in your capacity as trustee, or your personal capacity) under any provisions of the ITAA 1936 or the ITAA 1997?

Answer

No.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

1.             You are a resident for Australian income tax purposes.

2.             You are the registered shareholder and director of three foreign companies (collectively referred to as 'the Companies').

3.             The Companies are not residents for Australian income tax purposes. They do not carry on any business activities in Australia nor do they hold Australian real property assets.

4.             You hold the shares in the Companies absolutely on bare trust (the Bare Trusts) for your family member, Individual A, a non-resident for Australian income tax purposes.

5.             Individual A is the sole ultimate economic owner and controller of the Companies.

6.             Individual A is therefore also the sole beneficiary under the Bare Trusts and is therefore presently entitled to all returns (including dividends and capital gains) in respect of the shares in the Companies.

7.             It is mutually understood by both you and Individual A that Individual A is the owner of the shares in the Companies and that you are obliged to follow all of Individual A's instructions in respect of the Companies.

8.             The property of the Bare Trusts may be transferred by you to Individual A upon Individual A's request.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6

Income Tax Assessment Act 1936 section 98

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 106-50

Income Tax Assessment Act 1997 section 108-5

Reasons for decision

Question 1

Would any dividends that may be declared by the Companies be included in your assessable income (in your capacity as trustee, or your personal capacity) under any provisions of the ITAA 1936 or the ITAA 1997?

Summary

No. You are not assessable on any dividends that may be declared by the Companies under any provisions of the ITAA 1936 or the ITAA 1997 in either your personal capacity or your capacity as trustee.

Detailed reasoning

You hold the shares in the Companies on bare trust for Individual A.

A bare trust is a trust 'under which the trustee or trustees hold property without any interest therein, other than existing by reason of the office and the legal title as trustee, and without any duty or further duty to perform, except to convey it upon demand to the beneficiary or beneficiaries or as directed by them, for example, on sale to a third party' (Gummow J in Herdegen & Anor v Federal Commissioner of Taxation 88 ATC 4995; (1988) 84 ALR 271 at 281).

The Commissioner sets out his view of the tax consequences for bare trusts in the Decision Impact Statement on Colonial First State Investments Ltd v Commissioner of Taxation[2011] FCA 16 (Colonial First State DIS). In summary, the Commissioner's view is that bare trusts 'are recognised for all income tax purposes (except pursuant to relevant CGT provisions and in cases materially the same as those in Colonial First State)'.

The practical effect of this is that the trustee of a bare trust is not assessed in their personal capacity in respect of the income of a bare trust, and that Division 6 of Part III of the ITAA 1936 will instead apply in determining who is taxed on the income of the bare trust and in what amount.

In the circumstances, you hold the shares in the Companies on bare trust for Individual A. Accordingly, you will not be assessed in your personal capacity in respect of the income of the Bare Trusts, and Division 6 of the ITAA 1936 will apply to determine how income of the Bare Trusts is taxed and in what amount.

Section 98 of Division 6 of the ITAA 1936 sets out the Australian income tax consequences for income derived by trusts where the presently entitled beneficiary is a non-resident. It provides:

98 Liability of trustee

...

(2A) [Application of subs (2)] If:

(a) a beneficiary of a trust estate who is presently entitled to a share of the income of the trust estate:

(i) is a non-resident at the end of the year of income; and

(ii) is not, in respect of that share of the income of the trust estate, a beneficiary in the capacity of a trustee of another trust estate;

(iii) is not a beneficiary to whom section 97A applies in relation to the year of income; and

(iv) is not a beneficiary to whom subsection 97(3) applies; and

(b) the trustee of the trust estate is not assessed and is not liable to pay tax under subsection (1) or (2) in respect of any part of that share of the net income of the trust estate;

subsection (3) applies to the trustee in respect of:

(c) so much of that share of the net income of the trust estate as it attributable to a period when the beneficiary was a resident; and

(d) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia.

(3) [Tax liability of subs (2A) trustee] A trustee to whom this subsection applies in respect of an amount of net income is to be assessed and is liable to pay tax:

(a) if the beneficiary is not a company - in respect of the amount of net income as if it were the income of an individual and were not subject to any deduction; or

...

Thus, where subsection (2A) of section 98 of the ITAA 1936 applies, the trustee of a trust is liable to be assessed on the net income of the trust estate from Australian sources attributable to a period when the beneficiary was not a resident for Australian income tax purposes.

In the circumstances, Individual A is a non-resident for Australian income tax purposes that will be presently entitled to the income from the Bare Trusts. Accordingly, section 98 of the ITAA 1936 will apply to determine the assessability of dividends paid by the Companies to you, as trustee of the Bare Trusts.

The dividends that may be paid by the Companies are not considered to have an Australian source and therefore do not represent net income that you, as trustee of the Bare Trusts, will be assessed and liable to pay tax upon. This is on the basis that the Companies are non-residents for Australian tax purposes that do not carry on business in Australia nor own Australian real property assets.

Accordingly, you will not be assessable, either in your personal capacity or in your capacity as trustee of the Bare Trusts, on dividends that may be paid by the Companies.

Question 2

Would any capital gains that may arise from the transfer or disposal of the shares in the Companies be included in your assessable income (in your capacity as trustee, or your personal capacity) under any provisions of the ITAA 1936 or the ITAA 1997?

Summary

No. You are not assessable on any capital gains that may arise from the transfer or disposal of the shares in the Companies under any provisions of the ITAA 1936 or the ITAA 1997 in either your personal capacity or your capacity as trustee.

Detailed reasoning

The assessability of capital gains is set out in Parts 3-1 and 3-3 of the ITAA 1997.

Broadly, a capital gain may arise if a capital gains tax (CGT) event happens to a CGT asset in which a person has an ownership interest. A CGT event relevantly includes CGT event A1 (in section 104-10 of the ITAA 1997) which happens where a CGT asset is disposed of. The term 'CGT asset' is defined in section 108-5 of the ITAA 1997 as 'any kind of property or a legal or equitable right that is not property'. An example of a CGT asset provided in that section is shares in a company.

Accordingly, the sale, transfer or otherwise disposal of the shares in the Companies may attract consequences under Parts 3-1 and 3-3 of the ITAA 1997.

The Commissioner sets out his view of the tax consequences for bare trusts in respect of capital gains in the Colonial First State DIS. In summary, while the Commissioner recognises bare trusts for most income tax purposes, the Commissioner does not recognise bare trusts in respect of the CGT provisions.

Section 106-50 of the ITAA 1997 sets out when a CGT asset is treated as being the asset of a beneficiary of a trust instead of being an asset of the trust for the purposes of Parts 3-1 and 3-3 of the ITAA 1997. It provides:

106-50 Absolutely entitled beneficiaries

(1) For the purposes of this Part and Part 3-3 (about capital gains and losses) and Subdivision 328-C (What is a small business entity), from just after the time you become absolutely entitled to a *CGT asset as against the trustee of a trust (disregarding any legal disability), the asset is treated as being your asset (instead of being an asset of the trust).

(2) This Part, Part 3-3 and Subdivision 328-C apply, from just after the time you become absolutely entitled to a CGT asset as against the trustee (disregarding any legal disability), to an act done in relation to the asset by the trustee as if the act had been done by you (instead of by the trustee).

Example: An individual becomes absolutely entitled to a CGT asset of a trust. The trustee later sells the asset. Any capital gain or loss from the sale is made by the individual, not the trustee.

Accordingly, a beneficiary that is absolutely entitled to a CGT asset as against the trustee will be the relevant taxpayer if a CGT event happens to the asset.

Draft Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 sets out the circumstances in which a beneficiary of a trust is considered to be absolutely entitled to a CGT asset as against the trustee. TR 2004/D25 states:

10. The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction. This derives from the rule in Saunders v Vautier applied in the context of the CGT provisions (see Explanation paragraphs 41 to 50). The relevant test of absolute entitlement is not whether the trust is a bare trust (see Explanation paragraphs 33 to 40).

...

Core principle: applying it in practice

20. The most straight forward application of the core principle is one where a single beneficiary has all the interests in the trust asset. Generally, a beneficiary will not be absolutely entitled to a trust asset if one or more other beneficiaries also have an interest in it.

One beneficiary with all the interests in a trust asset

21. A beneficiary has all the interests in a trust asset if no other beneficiary has an interest in the asset (even if the trust has other beneficiaries).

22. Such a beneficiary will be absolutely entitled to that asset as against the trustee for the purposes of the CGT provisions if the beneficiary can (ignoring any legal disability) terminate the trust in respect of that asset by directing the trustee to transfer the asset to them or to transfer it at their direction (see Explanation paragraphs 76 to 79).

...

Bare trust is not the test

33. It is considered that the test of absolute entitlement is based on whether the beneficiary can direct the trustee to transfer the trust property to them or at their direction. While the existence of a bare trust may be a good indicator that a beneficiary of the trust is absolutely entitled, it is not necessary to establish that the trust is a bare trust in order to establish absolute entitlement. Likewise, the existence of a bare trust does not lead automatically to the conclusion that a beneficiary of the trust is absolutely entitled.

...

You hold the shares in the Companies on bare trust for Individual A, who is the sole beneficiary of the Bare Trusts. Individual A may direct you to transfer the shares in the Companies to Individual A, and additionally, Individual A may direct you to sell, transfer or otherwise dispose of the shares in the Companies.

Accordingly, section 106-50 of the ITAA 1997 will apply to the shares in the Companies, with the effect that the shares in the Companies will not be taken to be your assets (either in your capacity as trustee of the bare trust or in your personal capacity) and will instead to be taken to be the assets of Individual A.

Thus, in the event that the shares in the Companies were sold, transferred or otherwise disposed of, the resulting capital gain will not be included in your assessable income either in your personal capacity or in your capacity as trustee.