Capital Gains Tax: exemption for non-resident beneficiary of trust

Does subsection 855-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) disregard a capital gain that a foreign resident beneficiary of an Australian resident non-fixed trust makes because of the operation of subsection 115-215(3) of the ITAA 1997?

No. Subsection 855-10(1) of the ITAA 1997 only disregards a capital gain from a CGT event. A capital gain that a beneficiary of a trust makes because of the operation of subsection 115-215(3) of the ITAA 1997 is not a capital gain from a CGT event.

The trustee of a discretionary trust that is a resident trust for CGT purposes sold a CGT asset that was not taxable Australian property. The trustee made a capital gain from the sale. The contract of sale was entered into in Australia with the result that the capital gain was sourced here.

A beneficiary who was a foreign resident throughout the relevant income year is presently entitled to all of the income of the trust. As a result, the beneficiary is assessed under subsection 98A(1) of the Income Tax Assessment Act 1936 (ITAA 1936), as modified by section 102UX of the ITAA 1936, on so much of their interest in the trust's Division 6E net income as is attributable to sources in Australia.

The beneficiary is also taken to have made extra capital gains under subsection 115-215(3) of the ITAA 1997 as a result of the trust making a capital gain from the sale of the CGT asset. The beneficiary argues that these extra capital gains are disregarded under subsection 855-10(1) of the ITAA 1997.

If a trust's net income includes a net capital gain, section 115-215 of the ITAA 1997 treats relevant beneficiaries as having extra capital gains (so that the beneficiary can apply their capital losses and the appropriate discount percentage). Subsection 115-215(4A) of the ITAA 1997 makes it clear that the beneficiary is taken to have made these capital gains even though no CGT event has happened.

Section 855-40 of the ITAA 1997 exempts a capital gain that a foreign resident beneficiary in a fixed trust is taken (by section 115-215 of the ITAA 1997) to have made as a result of a CGT event happening to a CGT asset of a trust if, at the time of the event, the asset was not taxable Australian property of the trust. The exemption does not apply if the trust is a non-fixed trust.

It has been suggested that although section 855-40 of the ITAA 1997 does not exempt a capital gain which a foreign resident beneficiary of a non-fixed trust is taken (by section 115-215 of the ITAA 1997) to have made as a result of a CGT event happening to non-taxable Australian property of the trust, the gain is nevertheless exempt under subsection 855-10(1) of the ITAA 1997. That subsection provides that a foreign resident can disregard a capital gain or capital loss from a CGT event if the CGT event happens in relation to a CGT asset that is not taxable Australian property.

But because the beneficiary's capital gain arises from the operation of section 115-215 of the ITAA 1997, and not from the happening of a CGT event, the requirements of subsection 855-10(1) of the ITAA 1997 are not satisfied. Also, it would be anomalous if subsection 855-10(1) of the ITAA 1997 could apply in this way given the 'fixed trust' requirement in section 855-40 of the ITAA 1997. Accordingly, the capital gain cannot be disregarded.