Private ruling: Trust distribution
Published: February 2014
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013
Date scheme commenced: 1 July 2011

Ruling: Q1: Will the distributions from the capital of the Trust be assessable in your hands pursuant to section 99B of the Income Tax Assessment Act 1936 (ITAA 1936) to the extent that the distribution is attributable to a gain from capital gains tax (CGT) event C2? | A1: Yes.

Relevant facts and circumstances: You are an Australian resident for tax purposes who has received distributions from a trust established by a relative in the 2000-01 financial year. The trust The Trust is a non-resident discretionary trust settled by deed with a non-resident corporate trustee. You and your issue are beneficiaries of the Trust. The principal underlying asset of the Trust initially was real property situated overseas. In 2010, the trustee acquired all the issued shares in a non-resident company for the Trust and the company was appointed a beneficiary of the Trust. The Property was then transfer to the company. The Property proved to be located on land which had become valuable and a third party made an offer to purchase the land and the Property was sold in the 2011-12 financial year. The company then commenced liquidation and made several distributions out of the surplus assets of the company to its shareholder(s) over the 2011-12 and 2012-13 financial years. At the same time, the Trust made interim distributions to you of capital of the Trust Fund out of its corpus.

Relevant legislative provisions: Income Tax Assessment Act 1936 - Section 99B | Income Tax Assessment Act 1936 - Section 47 | Income Tax Assessment Act 1997 - Section 104-25 | Income Tax Assessment Act 1997 - Division 855

Reasons for decision: Summary: Subsection 99B(1) of the ITAA 1936 provides that where an amount, being property of a trust estate, is paid or applied for the benefit of a beneficiary during a year of income, and the beneficiary was a resident at any time during the year, that amount is included in the assessable income of the beneficiary. Paragraph 99B(2)(a) of the ITAA 1936 modifies the rule in subsection 99B(1) of the ITAA 1936 and has the effect that the amount included in assessable income under subsection (1) is reduced to the extent that the amount represents corpus of the trust estate, except to the extent to which the amount is attributable to amounts that would be assessable, if they were derived by a resident taxpayer. The distributions made to you by the trustee were distributions of trust capital. The issue to be determined is to what extent those distributions are attributable to amounts that would be assessable if they had been derived by a hypothetical resident taxpayer. The liquidator's distributions would not be assessable under section 47 of the ITAA 1936 because the gain from the sale of overseas land by a non-resident company would not have come within the extended definition of income derived by a company in subsection 47(1A) of the ITAA 1936 (pursuant to Division 855 of the ITAA 1997). However, the distributions would be capital proceeds from CGT event C2 happening to the shares in the non-resident company. A capital gain from CGT C2 happening to the shares would be included in the net capital gains of a resident taxpayer. This in turn would be included in the assessable income of such a taxpayer. Because there is no further hypothecation about the resident taxpayer it is impossible to say that the CGT discount would have applied. Accordingly, to the extent that the distribution to you is attributable to a gain from CGT event C2 happening to the trustee of the Trust, it will be assessable to you under section 99B of the ITAA 1936.