Edited version of private advice

Authorisation Number: 1051859734121

Date of advice: 8 July 2021

Ruling

Subject: CGT - trustee obligations

Question

Will you during the whole time you were a trustee of the non-resident trust result in Australian tax obligations?

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

Your parent is an overseas resident for taxation purposes.

You are an Australian resident for taxation purposes and a non-resident for country X for taxation purposes.

An overseas trust was established in 20XX. The trust is a family discretionary trust and the control and central management is conducted overseas.

The trust deed and amended trust deeds, show the appointment of the trustees as overseas residents.

You were appointed as a new trustee in 20XX.

The discretionary income beneficiaries, and children of your parent and grandchildren of your parent are all overseas residents. The discretionary capital beneficiaries shall be the discretionary income beneficiaries.

You are the only discretionary income and capital beneficiary that is an Australian resident.

You and your three siblings (overseas residents) are the final beneficiaries.

The trust assets consist of non-taxable Australian property. No additional assets have been introduced to the trust.

During your time as a trustee you were taking instructions and decisions at your parent's wishes.

The financial and legal decisions have always been acted upon overseas.

The administrative/managerial functions were undertaken overseas.

Any trust meetings were held overseas.

All minutes of the meetings and annual general meetings are recorded overseas.

You were not paid a remuneration from the trust while you were acting in the capacity as a trustee.

You and your siblings were provided a benefit in the form of an unsecured loan from the trust's assets. The loans are unsecured payable on demand, and as a reduction to your benefit you receive no income distribution which accumulates to capital to offset against your benefit off the assets in the trust.

The trust has not declared an income distribution to any beneficiary while in your capacity as a trustee.

In 20XX the trust declared a capital distribution to you and your siblings.

The trust does not declare an income distribution to your parent.

The trust's lodgment and payment obligations are reported and conducted overseas.

You resigned as a trustee in 20XX.

You continue to assist your parent since resigning as a trustee in the capacity as a family representative.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6

Income Tax Assessment Act 1936 Subsection 95(2)

Income Tax Assessment Act 1936 section 96B

Income Tax Assessment Act 1936 section 96C

Income Tax Assessment Act 1936 section 97

Income Tax Assessment Act 1936 section 98

Income Tax Assessment Act 1936 section 98(4)

Income Tax Assessment Act 1936 section 99A

Income Tax Assessment Act 1936 section 99B

Income Tax Assessment Act 1936 section 99B(1)

Income Tax Assessment Act 1936 section 99B(2)

Income Tax Assessment Act 1936 section 101

Income Tax Assessment Act 1936 section 102AAZD

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

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 Subdivision 115C

Income Tax Assessment Act 1997 Subdivision 802-A

Reasons for decision

Residency of trust under Australian domestic law

Section 95(2) in Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936) defines a resident trust for the purposes of Division 6, as follows:

A trust is a resident of Australia for an income year if:

(a) the trustee of the trust estate was a resident at any time during the income year; or

(b) the central management and control of the trust estate was in Australia at any time during the income year.

A trust estate that is not a resident trust estate in relation to a year of income is a non-resident trust estate.

Article 4 of the Multilateral Instrument Australia-Country X and states:

Where by reason of the provisions of [the Convention] a person other than an individual is a resident of both [Contracting States], the competent authorities of the [Contracting States] shall endeavour to determine by mutual agreement the [Contracting State] of which such person shall be deemed to be a resident for the purposes of [the Convention], having regard to its place of effective management, the place where it is incorporated or otherwise constituted and any other relevant factors. In the absence of such agreement, such person shall not be entitled to any relief or exemption from tax provided by [the Convention].

Taxation Ruling TR 2018/5: Income tax: central management and control test of residency discusses this following Bywater Investments Ltd & Others v. FC of T; Hua Wang Bank Berhard v. FC of T (2016) 260 CLR 169; [2016] HCA 45, 2016 ATC 20-589; 104 ATR 82 (the Bywater Case).

Paragraph 16 in TR 2018/5 explains the acts of central management and control and what does central management and control mean. This can involve the day-to-day management of the company operations, the financial and legal decisions, investment opportunities and so on.

In your case, the trust's control and central management is conducted in Country X as:

•         key decisions concerning the running and operation of the Trust were made by the trustees in Country X after consultation with your parent and at parent's direction.

•         day-to-day operations decisions concerning the running and operation of the trust were made by the individual or corporate trustees in Country X.

•         the trust's advisers are all located in and consulted from Country X.

•         Financial transactions relating to the trust are transacted in Country X; and

•         You effectively offered family support to your parent in operation of the trust through consulting the individual or corporate trustees in Country X.

Therefore, the Trust is not a resident of Australia under the domestic law and will be treated as a non-resident for taxation purposes and there is no need to consider the Australia and Double Tax Agreement with country X and Article 4(1) of the Multilateral Instrument.

Capital distribution

Subsection 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997) advises that the assessable income of a resident taxpayer includes statutory income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Section 10-5 of the ITAA 1997 lists those provisions about statutory income. Included in this list are:

•         section 102-5 of the ITAA 1997 which provides that a net capital gain is to be included in assessable income;

•         section 97 of the ITAA 1936 which deals with present entitlement to the net income of a trust estate;

•         sections 96B and 96C of the ITAA 1936 which deal with income from non-resident trust estates; and

•         section 99B of the ITAA 1936 which deals with receipt of trust income not previously subject to tax.

Section 96B of the ITAA 1936 applies where a resident taxpayer has an interest in a non-resident trust (including an interest that is to arise at a future time or is contingent to the happening of an event). Where this is the case, the beneficiary is deemed to be presently entitled to, and not under a legal disability, with regard to a share of the income of the trust. The amount is then calculated in accordance with section 96C and assessed under section 97.

Section 97 provides for a beneficiary who is presently entitled to a share of the income of a trust estate and not under any legal disability to be taxable in respect of that share. In those circumstances, the beneficiary's share of the trust income is included in their assessable income and the trustee is not required to pay tax on the beneficiary's share. Where a trustee who has a discretion to pay or apply income for the benefit of specified beneficiaries, exercises the discretion in favour of a beneficiary, section 101 of the ITAA 1936 deems the beneficiary to be presently entitled to the amount paid or applied and as such an amount is also assessed to the beneficiary under section 97.

Subsection 99B(1) of the ITAA 1936 provides that where, during a year of income, a beneficiary who was a resident at any time during the year is paid a distribution from a trust, or has an amount of trust property applied for their benefit, that amount is to be included in the assessable income of the beneficiary.

The Explanatory Memorandum (EM) for the Taxation Laws Amendment (Foreign Income) Bill 1990 at clause 16 explains that section 99B was introduced to assess an amount paid to an Australian resident beneficiary out of income from foreign sources that had been accumulated in a non-resident trust estate and would not have been taxed while the income accumulated.

Subsection 99B(2) reduces an amount that would otherwise be assessable under 99B(1) by so much (if any) of the amount as represents:

•         a distribution in the form of corpus except if that corpus resulted from the receipt of amounts by the trustee that if received directly by a resident taxpayer would have been assessable income;

•         an amount that would not have been included in the assessable income of a resident taxpayer if it had been derived by the taxpayer at the time of the derivation by the trustee;

•         an amount that is non-assessable non-exempt income of the beneficiary because of section 802-7 (relating to conduit foreign income);

•         an amount that has been previously assessed to the beneficiary under section 97 of the ITAA 1936 or to the trustee under sections 98, 99 or 99A;

•         an amount that is reasonably attributable to a part of the net income of another trust in respect of which the trustee of the other trust is assessed and liable to pay tax under section 98(4) of the ITAA 1936; and

•         an amount that has been included in the assessable income of any taxpayer (other than a company) under section 102AAZD (the 'transfer trust' rules).

Subdivision 115C of the ITAA 1997 provides rules which ensure that a share of a trust capital gain included in a beneficiary's assessable income under section 97 of the ITAA 1936 is also treated as a capital gain in the hands of the beneficiary. This enables the beneficiary to offset their capital losses and net capital losses against the amount, and to apply the CGT discount (if applicable) to the amount.

In Howard v FCT (No 2) (2011) 86 ATR 753, the taxpayer asserted that an amount distributed to him by a non-resident trust estate was a distribution of the corpus of the trust estate and was therefore a capital receipt. The Commissioner did not take issue with this assertion but said the amount was nevertheless assessable under section 99B to the extent that it was not assessable under section 97. The Court agreed, finding that when the amount that was later distributed to the taxpayer was derived by the trustee, it would have been assessable if it had been derived by an Australian resident.

This decision was affirmed on appeal in Howard v FCT (2012) 91 FCA 89.

In your case, during the years you were a trustee, the overseas trust made a resolution to make a capital distribution to the beneficiaries, which resulted in a capital gains tax. The trust was liable for this payment which was paid by the overseas trust to the relevant taxation authority in country X.

Therefore, the capital distribution made to you during your time as a trustee for the overseas trust will not be subject to tax as per section 10-5 of the ITAA 1997, as exclusions in subsection 99B(2) of the ITAA 1936 apply.