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Will the trustee of a trust, that is not a resident trust for CGT purposes, make a capital gain or capital loss from CGT event A1 in section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) on the sale of shares that do not have the necessary connection with Australia?

No. As the trust is not a resident trust for CGT purposes and the shares do not have the necessary connection with Australia, the trustee will not make a capital gain from CGT event A1 in section 104-10 of the ITAA 1997 on the disposal of the shares.

The taxpayer is the trustee of a trust that is not a unit trust. The taxpayer is not a resident of Australia and the central management and control of the trust is not in Australia.

The trust owns shares in an Australian resident company that is listed on the Australian stock exchange. The trust owns less than 10% of the total value of the shares in the company and has not owned more than 10% by value of the shares of the company at any time during the 5 years before the shares were sold.

During the year the trustee disposed of some of these shares.

If a trust is not a resident trust for CGT purposes, the trustee will only make a capital gain or capital loss from a CGT event if the CGT asset which is the subject of the event has the necessary connection with Australia (sections 136-5 and 136-10 of the ITAA 1997).

A resident trust for CGT purposes is defined in subsection 995-1(1) of the ITAA 1997: 'A trust is a resident trust for CGT purposes for an income year if, at any time during the income year: a) for a trust that is not a unit trust, a trustee is an Australian resident or the central management and control of the trust is in Australia; or ...'

In this situation, the trust is not a unit trust. The trustee is not a resident of Australia nor is the central management and control of the trust in Australia. It is therefore considered that the trust is not a resident trust for CGT purposes and will only make a capital gain or capital loss if the shares sold have the necessary connection with Australia.

The table in section 136-25 of the ITAA 1997 sets out when CGT assets have the necessary connection with Australia. Items 3 and 5 in the table specify when shares have the necessary connection with Australia. Item 5 is relevant in this case. It provides that a share in a company has the necessary connection with Australia if it is: 'A share or an interest in a share, in a company: a) that is an Australian resident, and a public company, for the income year in which the CGT event happens; and b) in which you and your associates beneficially owned at least 10% by value of the shares of the company (except shares that carried a right only to participate in a distribution of profits or capital to a limited extent) at any time during the 5 years before the CGT event happens.'

'Public company' is defined in subsection 995-1(1) by reference to section 103A of the Income Tax Assessment Act 1936 (ITAA 1936). Paragraph 103A(2)(a) of the ITAA 1936 provides that a company is a public company if shares in it, not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits, were listed for quotation in the official list of a stock exchange, being a stock exchange in Australia or elsewhere, at the last day of a year of income.

In this case, the shares held by the trust are shares in an Australian resident company that is listed on the Australian stock exchange. However the trust has not owned 10% or more by value of the shares in the company at any time during the 5 years before the shares were sold. It is therefore considered that the shares do not have the necessary connection with Australia and the trustee will not make a capital gain under section 104-10 of the ITAA 1997 on the disposal of the shares.