Edited version of private advice

Authorisation Number: 1051968801042

Date of advice: 6 April 2022

Ruling

Subject: Trust/deceased estate/fixed trust/non-resident beneficiary/not real Australian property

Question 1

Is the Trust 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)?

Answer

Yes

Question 2

Can the non-resident residual 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 periods:

Year ending 30 June 2021

The scheme commences on:

1 July 2020

Relevant facts and circumstances

The Deceased (the deceased) died on XX June 19XX.

The deceased had a spouse, Person A (Person A) and other close family members, Person B (Person B), Person C (Person C) and Person D (Person D) at the time of their death.

The deceased left a Will dated XX October 19XX and probate was granted on XX September 19XX.

The deceased's will provides that Person A was to have the use benefit and enjoyment of the property during their lifetime and upon their death, the property would be added to the residue of the estate.

Under the deceased's will, the residue of the estate upon the death of Person A should be divided into three life interests as follows:

•                    one half interest held for Person B and upon Person B's death, to be distributed to Person B's children who have attained 21 years.

•                    one quarter interest held for Person C and upon Person C's death, to be distributed to Person C's children who have attained 21 years.

•                    one quarter interest held for Person D and upon Person D's death, to be distributed to Person D's children who have attained 21 years.

The property was sold in March 19XX when Person A moved into an aged care home.

Person A died on XX January 20XX and the residue of the estate was divided into the three interests as per the deceased's Will.

Person D's interest was distributed in 2002.

Person B's interest was distributed in 2006.

Person C died XX May 20XX.

At the time of Person C's death, Person C had three children, Child A, Child B and Child C.

All three of Person C's children have satisfied the 21 year of age requirement under the deceased's Will and are each presently entitled to one third of the income and corpus of the residual estate.

Child A and Child B are both Australian residents for tax purposes.

Child C is not a resident of Australia for tax purposes.

The assets of the trust consist of listed equities on the Australian Stock Exchange (ASX) and unlisted managed funds.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 272-5 of Schedule 2F

Income Tax Assessment Act 1936 subsection 272-5(1) of Schedule 2F

Income Tax Assessment Act 1936 section 272-65 of Schedule 2F

Income Tax Assessment Act 1936 subsection 95A(2)

Income Tax Assessment Act 1997 section 855-15

Income Tax Assessment Act 1997 section 855-40

Income Tax Assessment Act 1997 subsection 855-40(2)

Income Tax Assessment Act 1997 paragraph 855-40(2)(a)

Income Tax Assessment Act 1997 subparagraph 855-40(2)(b)(i)

Income Tax Assessment Act 1997 subparagraph 855-40(2)(c)(i)

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

Reasons for decision

Question 1

Summary

As the interest of the remainder beneficiaries in the income and capital of 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 Person C.

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 Trust is indefeasible. There is no condition in the trust instrument, the Will, by which any of the residuary beneficiaries could lose their interest in the Trust.

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 in this case:

a)    The beneficiaries entitled to both the income and capital of the Trust are Child A, Child B and Child C, being the children of Person C.

b)    Child A, Child B and Child C are ready to take possession of the income and capital of the Trust following the death of Person C marking the end of Person C's life interest in the Trust as provided in the deceased's Will.

c)    There are no contingencies as the conditions in the deceased's Will are all satisfied by the time Person C died as all three children had attained 21 years.

d)    Each of Person C's children are beneficiaries entitled to 33.333% share of the income and capital of the Trust pursuant to the Will.

In this case, there are no conditions subsequent or any indication that anything external to the deceased's Will that would have the effect of a condition subsequent in relation to the income and capital of the Trust, by which the beneficiaries could lose their interests in the Trust.

Therefore, the remainder beneficiaries have a vested and indefeasible interest in the income and capital of the Trust.

As the interest of the remainder beneficiaries in the income and capital of 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 Person C.

Question 2

Summary

Given that the Trust is a fixed trust, Child C, the non-resident beneficiary of the Trust can disregard any capital gain made 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) 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: paragraph 855-40(2)(a)of the ITAA 1997; 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)of the ITAA 1997; 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) of the ITAA 1997.

In this case, the relevant conditions in subsection 855-40(2) of the ITAA 1997 are satisfied in respect of the interests of Child C, the non-resident beneficiary, in the Trust. This is because Person C is a non-resident of Australia for tax purposes, the Trust is a fixed trust at the time of the CGT event and the assets of the Trust are not Taxable Australian Property for the purposes of Division 855 of the ITAA 1997.

Therefore, given that the Trust is a fixed trust, Person C, the non-resident beneficiary of the Trust, can disregard any capital gain made in respect of their interest in the Trust under subsection 855-40(2) of the ITAA 1997.

Question 3

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.

To the extent that the amount relates to the capital gain that is disregarded by the non-resident beneficiary, Person C, 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) of the ITAA 1997.