Issue
Is the trustee of a trust that is not a resident trust for CGT purposes required to include a capital gain, in relation to the sale of an asset that does not have the necessary connection with Australia, in the net income of the trust calculated under section 95 of the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
No. The trustee of a trust that is not a resident trust for CGT purposes will not be required to include in the net income of the trust a capital gain from an asset that does not have the necessary connection with Australia. It is considered that section 136-10 of the ITAA 1997 overrides the requirement in section 95 of the ITAA 1936 that the net income of a trust be calculated as though the trustee were a resident of Australia (which would require the inclusion of capital gains from assets that do not have the necessary connection with Australia).
Facts
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 a company listed on the Australian stock exchange. During the income year the trustee disposed of some of these shares.
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 in the company at any time during the five years before the shares were sold.
Reasons for Decision
An issue arises as to how section 136-10 of the ITAA 1997 interacts with section 95 of the ITAA 1936.
Section 95 requires the trustee of a trust estate to calculate the net income of the trust as if the trustee were a taxpayer in respect of that income and a resident. Residents are required to include capital gains or capital losses from all sources in the calculation of their net capital gain for a year of income.
Sections 136-5 and 136-10 of the ITAA 1997 however, provide that the trustee of a trust that is not a resident trust for CGT purposes will only make a capital gain or capital loss from CGT event A1 happening to a share if it has the necessary connection with Australia. A share in a public company will only have the necessary connection with Australia if the trustees owns at least 10% by value of the shares at any time during the 5 years before they were sold (see item 5 in the table in section 136-25 of the ITAA 1997).
In this situation, the trust is not a unit trust. The trustee is not a resident of Australia and the central management and control of the trust is not in Australia. Therefore, the trust is not a resident trust for CGT purposes for the purposes of the definition in subsection 995-1(1) of the ITAA 1997.
The shares sold by the trustee do not have the necessary connection with Australia because the trustee has never owned 10% by value of the shares in that company. Therefore, under section 136-10 of the ITAA 1997 the trustee will not make a capital gain on the disposal of the shares.
It is a general rule of statutory interpretation that where there is a conflict between general and specific provisions, the specific provision prevails, see for example, Perpetual Executors and Trustees Association of Australia Ltd v. Federal Commissioner of Taxation (1948) 77 CLR 1.
Section 95 of the ITAA 1936 contains general provisions dealing with the calculation of the net income of a trust estate. Sections 136-5 and 136-10 of the ITAA 1997 contain more specific rules in relation to capital gains made by a trustee of a trust that is not a resident trust for CGT purposes. It is considered that these provisions override section 95 of the ITAA 1936.
Therefore it is considered that the trustee of a trust that is not a resident trust for CGT purposes will not be required to include a capital gain from an asset that does not have the necessary connection with Australia in the net income of the trust calculated under section 95 of the ITAA 1936.