1 Is the Trust able to disregard any capital gain or loss on the disposal of land and, a building constructed before 20 September 1985, at Address A under paragraph 104-10(5)(a) of the Income Tax Assessment Act 1997 ?
1 Yes. The land acquired by the Trust in 19YY, and the building constructed are pre capital gains tax (CGT) assets. Any capital gain or loss is disregarded. Question 2 Is the Trustee required to withhold, and remit to us, 45% tax from the distribution to a non-resident beneficiary from the disposal of the pre CGT asset? Answer 2 No. This ruling applies for the following period: 30 June 20YY The scheme commenced on: DD MM YYYY
A Deed of Settlement was made on DD MM 19YY between the Settlor and Trustee, with settlement of $XX constituted by the Deed to be known as the Trust. The Trust is a discretionary trust with the Deed listing groups of family members by 5 classes as beneficiaries. Class A beneficiaries included the children of Person A and or Person B, and their spouses of such children now living or born before the perpetuity date. The power to appoint a new and remove trustees was vested in Person A or should they die, their spouse and failing them, the legal personal representative. In 19YY the Trust purchased xxx hectares of vacant land at Address A (the Trust Property). The Title document was created on DD MM 19YY listing the registered owner as Company B, Trustee under Nominations of Trustees No x for Lot xx Crown Plan XX. Building A was built on the land by Person A around 19YY. This dwelling was not council approved and not in liveable condition when the property was sold in 20YY. On DD MM 19YY a Deed of Appointment was made between Person A and Company A, the retiring trustee, and Company B the new trustee of the Deed of Settlement dated DD MM 19YY known as the Trust.
On DD MM 19YY a Deed of Variation was made by Company B. A Deed of Renunciation was made on DD MM 20YY by Person A as beneficiary, renouncing their entitlement to any future benefits from the Trust whether income, capital or any other nature. Furthermore, the renunciation is irrevocable. The only asset purchased by the Trust was Property A. The Trust has never applied for a TFN or lodged an income tax return for it nor claimed any expenses paid for the Trust. The Trust had never generated any income but had incurred land tax and council rates etc to keep the land. However, the shareholders and directors of the corporate trustee personally funded all the expenses of the trust property over the last XX years. In 20YY there was a natural disaster that damaged land and fences. Person C repaired fences and added barriers to reduce the likely natural disasters in the future.
There was nowhere for Person C to store equipment and tools, so Building B and the surrounding area was started in 20YY. This has been extended a couple of times since. The approximate cost of Building B was $XX, together with other costs paid by Person C over several years. It is difficult for Person C to work out the cost base of the area. Person C built Building C to store equipment in 20YY. The market value of the Property A, assessed by a valuer on DD MM 20YY, was of $XX. The land was valued at $XX and improvements, including Building A, at $XX. Because one of the shareholders/directors of the corporate trustee could not continue paying for the expenses of the Trust, Property A being the only asset of the Trust was sold for $XX. The Settlement Statement reports the contract date as DD MM 20YY, with settlement occurring on DD MM 20YY. The statement also includes the following special condition: The buyer acknowledges that whilst there is improvement on the land, the seller does not warrant the improvement is habitable. The buyer shall occupy the improvement at the buyers risk and shall indemnify the seller for such risks. This clause survives the Settlement.
Beneficiary Person D is a foreign resident for tax purposes in Australia, residing in Country A.
Income tax Assessment Act 1936 section 97 Income tax Assessment Act 1936 subsection 98(3) Income tax Assessment Act 1997 section 102-20 Income tax Assessment Act 1997 section 104-10 Income tax Assessment Act 1997 subsection 102-10(5) Income tax Assessment Act 1997 paragraph 102-10(5)(a) Income tax Assessment Act 1997 section 108-5 Income tax Assessment Act 1997 subsection 108-55(2) Income tax Assessment Act 1997 subsection 108-70(2) Income tax Assessment Act 1997 subsection 108-85(3)
Capital Gains Tax Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss is made only if a CGT event happens to a CGT asset. A property is a CGT asset under section 108-5 of the ITAA 1997. Under section 104-10 of the ITAA 1997 CGT event A1 happens if you dispose of a CGT asset. However, there is an exception under subsection 104-10(5) where a capital gain or capital loss is disregarded if the asset was acquired before 20 September 1985. Therefore, the land acquired by the Trust in 19YY, as well as Building A constructed on it around 19YY, are pre CGT assets and any capital gain or loss is disregarded. Capital Improvements Subsection 108-55(2) of the ITAA 1997 explains when a building or structure is constructed on land that is a pre-CGT, and construction of a building starts on or after 20 September 1985, it is taken to be a separate CGT asset. In 20YY Person C purchased in his personal capacity, Building A for approximately $XX and placed it on Property A. In 20YY they also constructed Building B behind it. Between 202YY to 20YY Person C, again in their personal capacity, also built Building C for X equipment.
Therefore, Building B and C, are separate CGT assets to the land and those assets were created on the dates when construction began. The market valuation of all of the improvements to Property A, including Building A, were assessed to be $XX in the valuation on DD MM 20YY. Property A was sold for $XX and settlement occurred on DD MM 20YY. The taxation of unrelated improvement to a pre-CGT asset is contained in subsection 108-70(2) of the ITAA 1997. An addition or improvement is a major capital improvement of its' original cost is: • more than 5% of the amount you receive when you dispose of the asset, and • more than the improvement threshold for the income year in which you dispose of the asset. Neither the Trust nor Person C have the actual cost of the post CGT improvements to calculate the CGT cost base. Hypothetically, if the cost base of the unrelated improvements equalled the valuation of $XX made in 20YY, it would be more than 5% of the amount received when the Property A was sold. The improvement threshold is indexed annually. Subsection 108-85(3) of the ITAA 1997 contains the published threshold amount, for the 20YY income year as $XX.
While the actual cost base of the post CGT improvements is unavailable, the hypothetical example shows that even if the cost base was $0.00, the post CGT improvements would be less than the 20YY threshold amount. Therefore, the post CGT improvements are not considered to be major capital improvements and there is no CGT liability in relation to those assets. Withholding tax to non-resident beneficiary Generally, the net income of a trust is taxed to beneficiaries of the trust under section 97 of the Income Tax Assessment Act 1936 (ITAA 1936). However, if the beneficiary is a non-resident at the end of an income year, the trustee (rather than the beneficiary) is taxed on the beneficiary's share of the trust's net income (subsection 98(3) of the ITAA 1936). However, in this case, the Trust is not required to withhold 45% withholding tax from the distribution it makes to a non-resident beneficiary from the disposal of the pre-CGT asset, and also the post CGT improvements which are not major capital improvements as no CGT is payable on the assets. FRCGW Company B is the corporate trustee of the discretionary Trust. The Trust disposed of Australian real property, at Address A.
The Trust is an Australian resident for tax purposes and does not have a tax file number. It has not been required to lodged tax returns because it has not derived any income. While the Trust had liabilities for land tax, council rates and other expenses relating to property, these were personally met by the shareholders and directors of the corporate trustee. The Australian resident trust was not required to obtain a foreign resident capital gain withholding (FRCGW) clearance certificate from us. This is because Property A was sold and settled prior to 1 January 2025 and the market value of the property was less than the FRCGW threshold of $750,000.