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If a taxpayer became absolutely entitled to the assets of an Australian resident trust at a time when the taxpayer was a non-resident for taxation purposes and at a later date the taxpayer became a resident, is the acquisition date and the first element of the cost base and reduced cost base of the assets determined under section 136-40 of the Income Tax Assessment Act (ITAA 1997)?

Yes. Because the non-resident taxpayer owned CGT assets that did not have the necessary connection with Australia at the time of becoming a resident, the acquisition date and the first element of the cost base and reduced cost base is determined under section 136-40 of the ITAA 1997.

The taxpayer is an Australian citizen. Sometime after 20 September 1985 the taxpayer ceased to be a resident of Australia for taxation purposes.

While a non-resident, the taxpayer became absolutely entitled to the assets of a trust in which the taxpayer had a contingent interest. Shortly after the assets were transferred to the taxpayer. The trust was an inter vivos trust. The assets are shares in Australian resident public companies of which the taxpayer and associates have owned less than 10% by value of shares at all times.

The taxpayer later returned to Australia and became a permanent resident.

If a beneficiary of a trust (other than a unit trust or trust to which Division 128 applies) becomes absolutely entitled to an asset of the trust as against the trustee, CGT event E5 happens at the time the beneficiary becomes absolutely entitled (subsections 104-75(1) and (2) of the ITAA 1997).

As a general rule, the date that assets are taken to be acquired when CGT event E5 happens is determined under subsection 109-5(2) of the ITAA 1997.

However, more specific provisions in section 136-40 of the ITAA 1997 apply in respect of assets that do not have the necessary connection with Australia, are acquired on or after 20 September 1985, and are owned by a non-resident just before that person becomes a resident of Australia.

Under section 136-25 of the ITAA 1997, a share in a company has the necessary connection with Australia if the company is an Australian resident public company for the income year in which the CGT event happens and the taxpayer and associates beneficially owned at least 10% (by value) of the shares of the company at any time during the five years before the CGT event happens.

In this case, the shares did not have the necessary connection with Australia because the taxpayer and associates have never owned 10% or more of the shares in any of the companies. Accordingly, the specific provisions in section 136-40 of the ITAA 1997 will apply to determine the acquisition date and the first element of the cost base and reduced cost base of the shares.

Under subsection 136-40(3) of the ITAA 1997, the acquisition date of the assets will be the time the taxpayer becomes a resident. Under subsection 136-40(2) of the ITAA 1997 the first element of the cost base and reduced cost base will be their market value at that time.