Private ruling: Trust-capital gains tax-non-resident beneficiary
Date of advice: 17 August 2016
Published: September 2016
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Is the testamentary trust established under the will of Z a fixed trust? | A1: Yes. | Q2:  | A2: Yes. | Q3: Can a capital gain that a foreign resident remainder beneficiary is presently entitled to be disregarded if the gain is not on taxable Australian real property? | A3: Yes.

Relevant facts and circumstances: Z (the deceased) was a resident for tax purposes in Australia. The deceased passed away a number of years ago. Probate was granted for the deceased estate. Under the will of the deceased, a testamentary trust was established. The testamentary trust directed the trustee to pay the net income of that trust to the spouse of the deceased, A, during their lifetime. Upon A's death the trustee was to hold the residuary for the benefit and maintenance of the deceased's child Y with the balance of any net income not distributed to Y paid to X. On and from the death of Y the trustee was to hold the residual of the estate for X absolutely. X resides overseas and is a non-resident for Australian tax purposes. A passed a number of years ago. Y passed away recently. The assets of the deceased's estate consist of equities listed on the Australian Stock Exchange.

Relevant legislative provisions: Income Tax Assessment Act 1936 Schedule 2F | Income Tax Assessment Act 1936 S ection 272-5 | Income Tax Assessment Act 1936 Subsection 272-5(1) | Income Tax Assessment Act 1936 Section 272-65 | Income Tax Assessment Act 1997 Section 104-75 | Income Tax Assessment Act 1997 Subsection 855-10(1) | Income Tax Assessment Act 1997 Section 855-20 | Income Tax Assessment Act 1997 Section 855-40 | Income Tax Assessment Act 1997 Subsection 855-40(2) | Income Tax Assessment Act 1997 Subsection 855-40(3) | Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision: Detailed Reasoning - Fixed Trust: The trust instrument, for the purpose of subsection 272-5(1) of Schedule 2F of the Income tax Assessment Act 1936 (ITAA 1936), consists of the testamentary trust created under the Will of the deceased. A fixed trust is defined in subsection 995-1(1) of the Income tax Assessment Act 1997 (ITAA 1997), providing that a trust is a fixed trust if entities have fixed entitlements to all of the income and capital of the trust. The term "fixed entitlement' is then defined in subsection 272-5(1) of Schedule 2F of the ITAA 1936. A fixed entitlement in a trust is where a beneficiary has a vested and indefeasible interest in the income or capital of the trust. To determine if X has a fixed entitlement, it must be determined if he has a "vested and indefeasible interest". This term is not defined in tax legislation. The ordinary meaning can therefore be applied. Paragraphs 13.3 to 13.9 of the Explanatory Memorandum to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 reflects what this meaning may be. A "vested interest" means an individual has a present right to something, and "vested indefeasible interest" means that right cannot be lost. The testamentary trust provides a vested interest for X in receiving the residuary estate of the deceased's estate. There is no clause within the will that would authorise the Trustee to cause a beneficiaries' entitlement to be defeased. Since the party bequeathed within the will has a vested and indefeasible interest in a share of the residuary estate, they have fixed entitlements in accordance with subsection 272-5(1) of Schedule 2F of the ITAA 1936. Therefore, the testamentary trust founded by the will of the deceased is a fixed trust under section 272-65 of Schedule 2F of the ITAA 1936. | Detailed Reasoning - CGT event E5: Section 104-75 of the ITAA 1997 provides that a CGT event E5 occurs if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which division 128 applies, such as a deceased estate) against the trustee, disregarding any legal disabilities the beneficiary may be under. X became absolutely entitled to the residual assets of the testamentary trust upon the passing of Y. Therefore, CGT event E5 has occurred. | Detailed Reasoning - Division 855 of the ITAA 1997: Under section 855-40 of the ITAA 1997 a CGT exemption is available where a capital gain or loss is made by a foreign resident on an interest in a fixed trust and that interest is not taxable Australian property. Specifically, subsection 855-40(2) of the ITAA 1997 provides that a capital gain you make in respect of your interest in a fixed trust is disregarded if: • you are a foreign resident when you make the gain; • the gain is attributable to a CGT event happening to a CGT asset of a trust (the CGT event trust) that is the fixed trust; and • the asset is not taxable Australian property for the CGT event trust at the time of the CGT event. In this case, X is a foreign resident and the gain has occurred from an E5 CGT event. Section 855-20 of the ITAA 1997 defines taxable Australian real property as being: (a) real property situated in Australia (including a lease of land, if the land is situated in Australia); or (b) a mining, quarrying or prospecting right (to the extent that the right is not real property), if the minerals, petroleum or quarry materials are situated in Australia. In this case, the assets subject to the CGT event E5 are listed Australian securities and are therefore not taxable Australian property. All requirements of subsection 855-40(2) of the ITAA 1997 have been met therefore the capital gain of the beneficiary can be disregarded. Further, subsection 855-40(3) of the ITAA 1997 provides that as a trustee of a trust you are not liable where the capital gain has been disregarded for the beneficiary under subsection 855-40(2) of the ITAA 1997. Accordingly, the trustee is not liable for any CGT arising from CGT event E5 occuring.

Question 2: Is the foreign resident remainder beneficiary X presently entitled to 100% of all capital gains after the death of Y? Answer: