Edited version of private advice

Authorisation Number: 1052200775862

Date of advice: 13 December 2023

Ruling

Subject:Trust - double tax agreement - foreign property

Question: Will any capital gain made by the Trust on the sale of the Property be assessable in Australia?

Answer: No.

The Trust is viewed as being a resident of Australia for domestic taxation purposes under section 95 of the Income Tax Assessment Act 1936 (ITAA 1936) because one of the trustees of the Trust is an Australian resident.

However, the Mutual agreement procedure decision determined that under the tie-breaker test, the Trust was deemed to be resident only of Country X for the purposes of the Double Taxation Agreement (DTA) between Australia and Country X.

In accordance with Article 13 of the DTA, as the Trust is solely a resident of Country X, any capital gain made on the disposal of the Property is taxable only in Country X.

Income that is not taxable in Australia by virtue of a double tax agreement or convention Australia has with another country is treated as exempt income under section 6-20 of the Income Tax Assessment Act 1997.

Therefore, any capital gain made when the Trust disposes of the Property will not be included in the net income of the Trust under section 95 of the ITAA 1936.

This ruling applies for the following periods:

Income year ending 30 June 20XX

Income year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Trust is a discretionary trust that was established by deed summarised as follows:

•                     The Settlor - Person A.

•                     The Trustees - Person A and Trustee Company A located in Country X.

•                     Discretionary beneficiaries include Person A and Person A's spouse as the primary beneficiaries, and other discretionary beneficiaries.

•                     Interim distributions of income and capital - The Trustees at their sole discretion may pay or apply the remaining income and/or capital after they have been applied to pay for the expenses of administering the Trust, making purchases or acquisition of assets, and/or repayment/reduction of debts/liabilities incurred and in relation to the Trust for the benefit of a discretionary beneficiaries.

Person A solely purchased the property in Country X (the Property) where they and their family lived.

Several years later, the Property was settled into the Trust and Person A and their family continued to live there.

Some years later a variation was made to the Trust Deed to remove some of the discretionary beneficiaries, with Person A and Person B remaining as discretionary beneficiaries.

Several years later, Person A and their family moved to Australia and the Property was used for rental purposes after their departure.

Trustee Company A retired as a trustee of the Trust, being replaced with the Company A, which is a corporate trustee located in Country X.

The Trust Deed was varied naming Person A and Person B as the primary discretionary beneficiaries, with their children being named as the secondary discretionary beneficiaries.

The Trust is a resident of Australia for Australian domestic taxation purposes.

A Mutual agreement procedure (MAP) request was lodged to determine the residency status of the Trust.

The MAP decision stated that under the tie-breaker test the Trust was solely a resident of Country X under the Double Taxation Agreement between Australia and Country X.

The Trust is considering selling the Property.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 95

Income Tax Assessment Act 1997 section 6-20

International Tax Agreements Act 1953