ATO ID 2003/676: Capital gains tax: foreign source income made by a resident trust
Date of decision: 23 June 2003
Year of income: Year ending 30 June 2003 Year ending 30 June 2004
Business line: Public Groups and International

Issue
Is an Australian resident trustee assessable under subsection 98(4) of the Income Tax Assessment Act 1936 (ITAA 1936) on any resulting net capital gain on the vesting of the trust and registration of the trust assets, being shares in a foreign company, in the names of the non-resident beneficiaries?

Decision
No. The trustee is not assessable under subsection 98(4) of the ITAA 1936 because any resulting net capital gain is not attributable to sources in Australia.

Facts
An Australian resident trust (the Trust) was established before 20 September 1985 (pre-CGT) and vested on the death in late 2002 of an individual, a non-resident for taxation purposes. The trustee remained at all times an Australian resident for taxation purposes. The only assets of the Trust were post-CGT shares in a foreign company that is listed on foreign stock exchanges. The shares could only be physically sold via an overseas broker. The shares have increased in value and the trustee has an unrealised capital gain. The trustee currently holds the shares in a nominee capacity and proposes to transfer the shares to the non-resident beneficiaries in their individual names. Upon the vesting of the Trust, the individual's two children, who are both non-residents for Australian taxation purposes, became presently entitled to 50% each of the trust estate's net income (including the net capital gain). There is no net income (including the net capital gain) to which no beneficiary is presently entitled.

Reasons for decision
Summary: A resident trust, for CGT purposes, must include in the calculation of its net capital gain, capital gains and capital losses from CGT events happening to its worldwide assets. The net capital gain is then included in the net income of the trust in accordance with subsection 95(1) of the ITAA 1936. Broadly, subsection 98(4) of the ITAA 1936 provides that the trustee of a trust may be assessed where there is an individual beneficiary who is a non-resident at the end of a year of income and that beneficiary is presently entitled to income of the trust. If the beneficiary has not been a resident of Australia at any time during the income year, the trustee is assessed on so much of the share of the net income of the trust estate as is attributable to sources in Australia. As a consequence of the vesting of the trust on the death of the individual, the two non-resident beneficiaries became presently entitled to the net income of the trust. The fundamental issue to be resolved is whether any capital gain made by the trustee in respect of the shares, is sourced in Australia. The capital gains tax provisions do not contain any provision that expressly determines the source of a capital gain, or net capital gain, for the purposes of Division 6 of Part III of the ITAA 1936. The 'taxable Australia property' tests in section 855-15 of the Income Tax Assessment Act 1997 (ITAA 1997) are not relevant for this purpose. In the absence of a statutory source rule for capital gains for the purposes of Division 6 of Part III of the ITAA 1936, reliance is appropriately placed on the common law source rules as they relate to income notwithstanding that net capital gains are a form of statutory income. The leading Australian authority on the source of profits from the sale of shares is Australian Machinery and Investments Company Ltd v. Deputy Commissioner of Taxation (WA) (1946) 180 CLR 9; 3 AITR 359; (1946) 8 ATD 81 where it was held that where shares are situated outside Australia and sold outside Australia, the profit on sale is derived wholly from a source outside Australia. Thus, where shares are sold using an offshore broker, the buying and selling is undertaken and thus sourced, where the contract is concluded. Therefore, in applying the common law rules, the source of the capital gain made by the trustee will be outside Australia. This is because the shares in the foreign company are only traded on foreign stock exchanges and can only be bought and sold via an overseas broker and, as the company is trading overseas, from a practical viewpoint, the increase in the economic value of the shares would occur outside Australia. Accordingly, as the source of the capital gain is outside Australia, the trustee is not assessable under subsection 98(4) of the ITAA 1936 on any resulting net capital gain from the vesting of the trust and registration of the shares in the names of the non-resident beneficiaries.

Legislative references: Income Tax Assessment Act 1936 subsection 95(1) subsection 98(4)
Case references: Australian Machinery & Investment Co Ltd v. Deputy Commissioner of Taxation (1946) 180 CLR 9 (1946) 3 AITR 359 (1946) 8 ATD 81
Related public rulings and determinations: Taxation Ruling IT 2680
Related ATO interpretative decisions: ATO ID 2002/394 | ATO ID 2002/903 | ATO ID 2002/913
Subject references: Capital gains tax Capital gains Foreign income Foreign source income Non resident beneficiaries Trusts Discretionary trusts Trustees