Edited version of private advice

Authorisation Number: 1052089898059

Date of advice: 10 March 2023

Ruling

Subject: CGT - distribution to non-resident beneficiary

Question 1

Does the Commissioner accept that the gains from the sale of the Company X shares by the Trustee for the Trust, to which Company Y has been made presently entitled are not taxable in Australia as they would be disregarded capital gains under subsection 855-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Does the Commissioner accept that as Company Y is a non-resident beneficiary of the Trust, who is presently entitled to the capital gains arising from the sale of the Lux shares by the Trustee, they will not be subject to Australian tax on the capital gains under section 98A of the Income Tax Assessment Act 1936 (ITAA 1936) and Subdivision 115-C of the ITAA 1997, since those gains are not taxable by Australia under Article 7(1) nor under Article 13(5), both when coupled with the operation of Article 1(2) of the Country Y treaty (the treaty)?

Answer

No.

Question 3

Does the Commissioner accept that Article 22 of the treaty does not permit, nor cause to permit, Australia to tax those gains since the wording of Article 22 of the treaty requires that these capital gains first "may be taxed" in Australia via the treaty, which is not the case if the effective exemption in Article 7(1) applies or the exemption in Article 13(5) applies, both when coupled with the operation of Article 1(2) of the treaty?

Answer

No.

Question 4

Will the Commissioner confirm that if tax on the capital gains assessed to Company Y is paid by the Trust, then that tax will be deducted from the income tax assessed against Company Y and the excess amounts will be refundable under subsection 98A(2) of the ITAA 1936?

Answer

Yes.

Question 5

Would the Commissioner not require Company Y to furnish an annual return, further return nor a special return pursuant to sections 161, 162 and 163 of the ITAA 1936 respectively showing the Australian sourced trust capital gains they are presently entitled to from the sale of the Company X shares?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Company Y

Company Y was established in Country Y.

Company Y is a resident of Country Y for tax purposes.

Company Y carries on business in Country Y.

Company Y was a non-resident of Australia throughout the ruling period.

Company Y does not carry on any activities in Australia, has no premises in Australia, has no staff in Australia and no agents in Australia.

The Trust

The Trust is a discretionary family trust located in Australia. The Trust was an Australian resident trust estate during the ruling period.

The Trust was not a fixed trust during the ruling period.

The Trustee is an Australian resident company for the purpose of taxation in Australia.

Trust Beneficiaries

Company Y is included as a beneficiary of the Trust.

Company Y's ultimate owner is also a beneficiary of Trust.

Trust's shareholding in Company X

Company X is an Australian resident company

The Trust holds approximately 25% shareholding in Company X.

The Trust sold Company X shares in the 20XX income year.

The Trustees resolution

As a result of the Trustee's resolution Company Y was made presently entitled to their share of the Trust's capital gains in the year ended 30 June 20XX.

The Trust remitted to Company Y in Country Y the Trust distribution in the income year ended 30 June 20XX, from the capital gain made on the Company X shares to which they were made specifically entitled.

As of 30 June 20XX, Company Y had only received this one distribution from the Trust, they have not received distributions from any other trusts.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 95

Income Tax Assessment Act 1936 section 98

Income Tax Assessment Act 1936 section 98A

Income Tax Assessment Act 1936 Division 6E

Income Tax Assessment Act 1936 section 161

International Tax Agreements Act 1953 section 3AAA

International Tax Agreements Act 1953 section 3(11)

International Tax Agreements Act 1953 section 4

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 115-215

Income Tax Assessment Act 1997 section 115-220

Income Tax Assessment Act 1997 section 855-10

Income Tax Assessment Act 1997 section 855-15

Income Tax Assessment Act 1997 section 855-40

Reasons for decision

Question 1

As Company Y is a non-resident beneficiary of the Trust at the end of the 202X income year, they cannot disregard under section 855-10(1) of the ITAA 1997 their share of a non-TAP resident Trust capital gain where it is assessable to them pursuant to section 98A of the ITAA 1936.

Question 2

As Company Y is presently entitled to the capital gains emanating from the sale of the Company X shares, they are still assessed and liable to Australian tax on the capital gains under section 98A of the ITAA 1936 and Subdivision 115-C of the ITAA 1997 after consideration of the Articles, both when coupled with the operation of another Article of the treaty.

Question 3

An Article of the treaty operates to clarify the source of income to ensure a country can exercise the taxing rights that are allocated to it by the treaty, in accordance with the intention of the treaty. As an Article of the treaty operates to allocate taxing rights to Australia with respect to the gains from the disposal of the shares by the trustee, and this is not altered by another Article of the treaty, the relevant Article operates to deem those gains to arise from Australian sources for the purposes of Australian domestic tax law.

Question 4

If tax on the capital gains assessed to Company Y is paid by the Trust, then that tax will be deducted from the income tax assessed against Company Y and the excess amounts will be refundable under subsection 98A(2) of the ITAA 1936.

The application of Division 6E of the ITAA 1936 means Company Y will not have been assessed under subsection 98A(1) of the ITAA 1936, which would normally have been the trigger for a subsection 98A(2) of the ITAA 1936 credit. However, section 95AAB of the ITAA 1936 ensures that the amount included in the Company Y's assessable income because of Subdivision 115-C of the ITAA 1997 is deemed to be included in their assessable income under subsection 98A(1) of the ITAA 1936 for the purpose of the credit provision in subsection 98A(2) of the ITAA 1936.

Question 5

Company Y is a non-resident of Australia and has assessable income from their share of the Trust's net income that they are presently entitled to, that is taxable in Australia.

Accordingly, Company Y is required to lodge an income tax return, for the income year ended 30 June 20XX pursuant to section 161 of the ITAA 1936.