Preamble
No. Where a CGT event happens to a CGT asset of a foreign trust for CGT purposes [1] and that asset is not 'taxable Australian property': [2] • the trustee disregards any capital gain (or capital loss) from that event in calculating the net income of the trust under subsection 95(1) of the ITAA 1936, and • Subdivision 115-C of the ITAA 1997 does not treat the trust's beneficiaries as having capital gains (or make the trustee assessable) in respect of the event.
However, if an amount attributable to such a gain is paid or applied for the benefit of a resident beneficiary of the trust, the amount may be included in the beneficiary's assessable income under section 99B of the ITAA 1936. [3]
The Kiwi Trust was established in New Zealand. The trust is a foreign trust for CGT purposes as the trustee company is incorporated in New Zealand and the trust is centrally managed and controlled there. The trustee can appoint income and capital of the trust to a range of beneficiaries, some of whom are resident in Australia.
The trustee invests in shares in Australian companies that are not 'taxable Australian property'. The trustee sells some of those shares.
As the trust is a foreign trust for CGT purposes and the shares are not 'taxable Australian property', no capital gains or losses from the sale will be reflected in the net income of the trust under subsection 95(1) of the ITAA 1936. Accordingly, Subdivision 115-C of the ITAA 1997 will not treat the trust's beneficiaries (or the trustee) as having capital gains in respect of the sale.
The trustee distributes an amount attributable to the gain to a beneficiary resident in Australia. Section 99B of the ITAA 1936 may then apply to include an amount in the beneficiary's assessable income.
This Determination applies to years of income commencing both before and after 13 December 2017. However, this Determination will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of this Determination (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10).
Appendix 1 - Explanation
Subsection 95(1) of the ITAA 1936 requires the trustee of a trust estate to calculate the net income of the trust for a year of income as if the trustee were a resident taxpayer (the residency assumption). Residents are required to include capital gains and capital losses from all sources in the calculation of their net capital gain (which forms part of the net income of the trust).
Section 855-10 of the ITAA 1997 provides that the trustee of a trust that is a foreign trust for CGT purposes disregards a capital gain or a capital loss if the relevant CGT event happens in relation to a CGT asset that is not 'taxable Australian property'.
An issue arises as to how section 855-10 of the ITAA 1997 interacts with the residency assumption in the definition of net income in subsection 95(1) of the ITAA 1936.
If the assumption in subsection 95(1) of the ITAA 1936 were applied for the purposes of section 855-10 of the ITAA 1997, the provisions would be in conflict. Section 855-10 would have no operation at all in relation to foreign trusts, despite its express reference to them. This cannot have been the intention of the legislature. It is a general (though rebuttable) rule of statutory interpretation that, where there is a conflict between general and specific provisions, the specific provision prevails. [4]
Subsection 95(1) of the ITAA 1936 is a general provision dealing with the calculation of the net income of a trust estate. In contrast, section 855-10 of the ITAA 1997 contains more specific rules in relation to capital gains made by a trustee of a trust that is a foreign trust for CGT purposes. In this context, it is considered that the reference to the trustee of a foreign trust in section 855-10 of the ITAA 1997 prevails over the assumption in subsection 95(1) of the ITAA 1936.
Therefore, the trustee of a trust that is a foreign trust for CGT purposes disregards a capital gain or loss from a CGT event happening to an asset that is not 'taxable Australian property'. Accordingly, such a gain or loss is not reflected in the net income of the trust for the purposes of subsection 95(1) of the ITAA 1936.
A consequence of this interpretation is that section 115-215 of the ITAA 1997 will not apply to treat beneficiaries of the trust as having capital gains in respect of CGT events occurring in the circumstances described above. Equally, the trustee will not be assessable on increased income under sections 115-220 or 115-222 of the ITAA 1997.
However, although the capital gains are not included in the net income in the year they are made, section 99B of the ITAA 1936 may apply to assess a beneficiary if amounts attributable to the gains are paid or applied for the benefit of the beneficiary. [5]
Appendix 2 - Alternative views
An alternative view put to the Commissioner is that section 855-10 of the ITAA 1997 does not operate in relation to the calculation of the net income of a foreign trust (that is, the residency assumption in subsection 95(1) of the ITAA 1936 means that gains and losses from all assets are taken into account in working out the net income of such a trust).
On this view, it is argued that section 855-10 of the ITAA 1997 only applies to disregard the amount of a capital gain or capital loss from non-taxable Australian property that is reflected in the amount of net income that otherwise falls to be assessed to a trustee of a foreign trust under section 115-222 of the ITAA 1997.
The Commissioner does not consider that there is any statutory basis for this interpretation. The disregarding of a capital gain or loss logically occurs prior to the calculation of a net capital gain.
This approach would also require the trustees of foreign trusts to maintain records for their worldwide assets so as to determine capital gains and losses from those assets for Australian tax purposes. This is an unnecessary administrative burden.
Compendium
The ATO published responses to 15 submissions on this ruling in TD 2017/23EC. Outcome labels are heuristic — read the ATO response for the detail.
1The residency assumption applies broadly. The residency assumption in subsection 95(1) of the Income Tax Assessment Act 1936 (ITAA 1936) should be given its full intended application. The legislative intention of the residency assumption is to ensure that the net income captures the whole of the trust's taxable income. It is intended to apply for the balance of the tax legislation, including Division 855 of the Income Tax Assessment Act 1997 (ITAA 1997). This is supported by the Full Federal Court decision in Howard v. Commissioner of Taxation [2012] FCAFC 149, where the general residency assumption in section 99B of the ITAA 1936 (which applies to all forms of income) took precedence over the specific rule in subsection 44(1)(b) (which sought to tax non-residents only in respect of dividends paid out of Australian sourced profits). On one view, section 95(1) is a more specific provision when calculating the net income of a trust estate and should take precedence over section 855-10 of the ITAA 1997.rejected
ATO response
Disagree. The purpose of subsection 95(1) is to render source irrelevant, consistent with the mischief addressed following Union Fidelity Trustee Company Australia Limited v. Federal Commissioner of Taxation [1969] HCA 36. Section 855-10 on the other hand is making clear that only certain assets are potentially subject to tax when owned by a non-resident trustee. To the extent there is a potential overlap between the two provisions, section 855-10 in our view would be more specific, and would have no sensible scope of operation if the residency assumption prevailed (see issue 3 below). We consider that the decision in Howard offers no support for the contrary view. Indeed, it provides an example of a specific rule in section 99B prevailing over a general rule regarding source of dividends.