Private ruling: Trust income
Published: August 2017
Ruling period: 1 July 2014 to 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Will the excess of the Redemption Proceeds over the Subscription Amount (both amounts determined in the currency in which the Offshore Feeder Fund shares are denominated) in relation to the redemption of shares in Offshore Feeder Funds in the income year ended 30 June 2015 constitute an assessable dividend under section 44 of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes | Q2: If so, will the dividends be attributable to sources in Australia for the purposes of section 97 of the Income Tax Assessment Act 1936 (ITAA 1936)? | A2: No | Q3: Are gains and losses on the Offshore Feeder Fund investments (that do not form part of the dividend) on revenue account for tax purposes? | A3: Yes | Q4: Is any Foreign Exchange (FX) Gain or Loss in respect of the initial investment regarded as having a foreign source? | A4: Yes | Q5: Does any Foreign Realisation Event 2 (FRE2) Gain or Loss arising on receipt of redemption proceeds have a foreign source? | A5: Yes | Q6: Does any FX Loss and any FRE2 Loss reduce dividend income in computing the net income of the Trust that is not attributable to sources in Australia? | A6: Yes | Q7: Is any capital gain arising to the Trust in respect of an FX Gain or a dividend reduced by the amount included in assessable income in relation to an FX Gain or dividend by application of section 118-20 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A7: Yes

Relevant facts and circumstances: The Trust was established by Deed on 1 April 2014 (the Trust Deed). The Trust is a discretionary trust. The Trust Deed provides that the Trust is governed by the laws of Belize. The Trustee of the Trust is not an 'associate' of any of the Offshore Feeder Funds, the Overseas Hedge Funds, or the investment managers of those Funds, within the meaning of that term in section 318 of the ITAA 1936 (i.e. they are external hedge funds). In this regard, the Trustee of the Trust is independent from and acts at arm's length from each of the aforementioned entities. The Trust is centrally managed and controlled within Australia and is an Australian resident for the purposes of subsection 95(2) of the ITAA 1936. The Trustee does not have any carried forward tax losses or capital losses as at 30 June 2014. Since its establishment, the Trust has predominantly invested in overseas hedge funds. It also holds cash balances in various currencies and minor investments in offshore resource funds. The Trustee invests (by subscribing for ordinary shares) in Offshore Feeder Funds (companies in legal form), which are typically located in the Cayman Islands or British Virgin Islands. The Offshore Feeder Funds in turn hold an interest in the relevant Offshore Hedge Fund by subscribing for shares in the Offshore Feeder Fund. The Offshore Feeder Funds are operated by the same entity which operates the underlying Offshore Hedge Fund. Each of the Offshore Feeder Funds is a body corporate and, therefore, a 'company' for the purposes of subsection 995-1(1) of the ITAA 1997. None of the Offshore Feeder Funds are foreign hybrid companies (which could otherwise be deemed to be a partnership for the purposes of the ITAA 1936 and ITAA 1997). The Offshore Feeder Funds do not buy-back their shares from the Trustee; rather, The shares are redeemed (i.e. cancelled) by the Offshore Feeder Fund. That is, redemption is a one-step process under which the share ends. This is to be contrasted with a buy-back as defined in section 159GZZZK of the ITAA 1936, which involves a transfer of the relevant shares, rather than an ending of the shares. Where the shares bought back are cancelled, that cancellation occurs under a second transaction which is separate from the buyback. The Trust's share interests in the Offshore Feeder Funds should be classified as equity under the debt/equity rules in Division 974 of the ITAA 1997, as there is not an effectively non-contingent obligation to provide either: A fixed return (rather, the return will vary depending on the performance of the underlying hedge fund assets); or A return of the amount initially invested (if the Net Asset Value of the underlying hedge assets falls below the amount initially invested, the Trustee may only redeem the shares for the lower amount). The debt/equity classification of the shares in the Offshore Feeder Funds should not impact the income tax treatment of a return of or on these shares in the hands of an Australian tax resident holder. The Taxation of Financial Arrangement rules in Division 230 of the ITAA 1997 should not apply to the Trust, as it does not meet the turnover and asset requirements set out in section 230-455 of the ITAA 1997. Upon request by the ATO you provided more information to assist with the revenue/capital account distinction for the purposes of TD 2011/21. The Trust is a fund of funds It holds around 10 hedge fund investments Currently it has $X invested The investments are in shares in foreign feeder funds for hedge fund investments The investments don't pay periodic dividends Redemption is the only mechanism for obtaining a return on the investment The Trust invests in speculative, illiquid and risky investments The shares in each of the Offshore Feeder Funds have a par value. The amounts subscribed for, and amounts received on redemption of, the Offshore Feeder Fund investments are foreign currency denominated amounts (eg, USD and GBP). The Trust does not have a valid functional currency election. Generally, in relation to the Offshore Feeder Funds, the relevant prospectus will provide that: The Offshore Feeder Fund does not expect to pay dividends or other distributions to shareholders; Shares in the Offshore Feeder Fund may be redeemed on the last business day of the month/quarter, at the Net Asset value per share on that date, by written notice (3 days before the last business day) given to the Administrator; Net Asset value equals the fair value of the assets of the Offshore Feeder Fund, less liabilities; Payment of the redemption proceeds will normally take place within 15 business days after the redemption date. The redemption of Offshore Hedge Fund interests takes place by way of redemption of a redeemable class of shares in the Offshore Feeder Fund. Each of the Offshore Feeder Funds and Offshore Hedge Funds are not Australian tax resident entities (i.e., they are not established or incorporated, as relevant, in Australia, and their central management and control lies outside of Australia.) The investments do not give rise to any dividend income or other distributions during the period of ownership. To exit an investment the following occurs: The investor has a right to redeem their shares for the net asset value per share. For liquidity reasons, there are often restrictions on redemptions. Redemption is effected by the investor lodging a redemption notice and, if/to the extent redemption is accepted, the relevant shares being removed from the register of members. A confirmatory notice would be issued to the investor following redemption. There typically is a delay of at least some days between the time at which redemption occurs (i.e. when the relevant shares are removed from the register) and the time at which the Trust receives the redemption proceeds. The redeemable shares are not Redeemable Preference Shares. The Offshore Feeder Funds generally don't account for subscriptions and redemptions in a manner that is familiar from an Australian perspective. However, inquiries of the Offshore Feeder Funds reveal that: The entire amount subscribed would be credited to an account that we recognise as share capital or par value/share premium; The funds do not recognise profits in the way that a trading company typically would; Rather, the role of the feeder funds is to pay amounts to investors on redemption equal to their share of the underlying fund's net asset value - without regard to profits. Rather, any ongoing fund accounting focuses on providing regular updates of the amount of net asset value referable to each shareholder; and Typically an amount equal to the subscription amount is debited to the same account credited upon subscription and the excess is debited to a different account, but not one that we would recognise as share capital.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 6(1) | Income Tax Assessment Act 1936 6B(1), 6B(2A) and 6B(3) | Income Tax Assessment Act 1936 section 44 | Income Tax Assessment Act 1936 subparagraph 44(1)(a)(i) | Income Tax Assessment Act 1936 paragraph 44(1B)(b) | Income Tax Assessment Act 1936 subsection 95(2) | Income Tax Assessment Act 1936 section 97 | Income Tax Assessment Act 1936 section 159GZZZK | Income Tax Assessment Act 1936 section 318 | Income Tax Assessment Act 1997 subsection 8-1(1) | Income Tax Assessment Act 1997 subsection 104-25(1) | Income Tax Assessment Act 1997 subsection 104-25(3) | Income Tax Assessment Act 1997 subsection 118-20(1) | Income Tax Assessment Act 1997 paragraph 118-20(1)(a) | Income Tax Assessment Act 1997 Subdivision 207-B | Income Tax Assessment Act 1997 Division 230 | Income Tax Assessment Act 1997 section 230-455 | Income Tax Assessment Act 1997 subsection 775-15(1) | Income Tax Assessment Act 1997 subsection 775-30(1) | Income Tax Assessment Act 1997 section 775-45 | Income Tax Assessment Act 1997 subparagraph 775-45(1)(b)(iii) | Income Tax Assessment Act 1997 section 775-70 | Income Tax Assessment Act 1997 section 775-75 | Income Tax Assessment Act 1997 Subdivisions 960-C and 960-D | Income Tax Assessment Act 1997 Division 974 | Corporations Act 2001sections 254T and 256B | Taxation Laws Amendment (Company Law Review) Act 1998 | Income Tax Assessment Act (No. 4) 1967 (No. 85, 1967) New Business Tax System (Taxation of Financial Arrangements) Bill (No. 1) 2003

Reasons for decision: Summary: The excess of the Redemption Proceeds over the Subscription Amount are: A 'dividend' for the purposes of the section 6(1) of the ITAA 1936 definition of 'dividend' [as it read prior to being amended by the Taxation Laws Amendment (Company Law Review) Act 1998 ]; and Assessable income of the Trustee for the purposes of subparagraph 44(1)(a)(i). | Detailed Reasoning - Detailed reasoning: Relevant legislation The excess of the Redemption Proceeds over the Subscription Amount will constitute an assessable dividend if the amount satisfies: The section 6(1) definition of 'dividend' in subsection 6(1) of the ITAA 1936 [as it read prior to being amended by the Taxation Laws Amendment (Company Law Review) Act 1998 ]; and Subparagraph 44(1)(a)(i) (which includes in the assessable income of a resident shareholder dividends paid by a company out of profits derived by it from any source). The correct subsection 6(1) of the ITAA 1936 definition of 'dividend' is the one pre the amendments made by Item 8 of Schedule 3 of the Taxation Laws Amendment (Company Law Review) Act 1998 (Act No. 63 of 1998 - Assented 29 June 1998) which amended the definition of 'dividend' in subsection 6(1) with effect such that ' The amendments made by this Schedule apply to dividends paid after the commencement of this item by a company with shares with no par value. ' [Emphasis added] The shares in each of the Offshore Feeder Funds have a par value. The former definition of 'dividend' in subsection 6(1) of the ITAA 1936 [as it read prior to being amended by the Taxation Laws Amendment (Company Law Review) Act 1998 ] was as follows: “Dividend includes: (a) Any distribution made by a company to any of its shareholders, whether in money or other property; (b) Any amount credited by a company to any of its shareholders as shareholders; and (c) The paid-up value of shares issued by a company to any of its shareholders to the extent to which the paid-up value represents a capitalization of profits; But does not include: (d) Moneys paid or credited by a company to a shareholder or any other property distributed by a company to shareholders (not being moneys or other property to which this paragraph, by reason of subsection (4), does not apply), where the amount of the moneys paid or credited, or the amount of the value of the property, is debited against an amount standing to the credit of a share premium account of the company; (e) Moneys paid or credited, or property distributed, by a company by way of repayment by the company of moneys paid up on a share except to the extent that: (i) if the share is cancelled or redeemed - the amount of those moneys or the value of that property, as the case may be, is greater than the amount to which the share was paid up immediately before the cancellation or redemption; or (ii) in any other case - the amount of those moneys or the value of that property, as the case may be, is greater than the amount by which the amount to which the share was paid up immediately before the repayment exceeds the amount to which the share is paid up immediately after the repayment; or (f) A reversionary bonus on a policy of life-assurance.” Subparagraph 44(1)(a)(i) of the ITAA 1936 relevantly provides that: The assessable income of a shareholder in a company (whether the company is a resident or a non-resident) includes: (a) If the shareholder is a resident: (i) Dividends (other than non-share dividends) that are paid to the shareholder by the company out of profits derived by it from any source Taxation treatment of Redemption Proceeds It is uncontroversial that upon the redemption of shares in the Offshore Feeder Funds CGT event C2 in subsection 104-25(1) of the ITAA 1997 happens as an intangible CGT asset ends by the asset being redeemed. However, the relevant question is, whether a part of the Redemption Proceeds also constitutes an assessable dividend. The law relating to the taxation of the proceeds from a redemption of shares has evolved over the years. The CCH Federal Income Tax Reporter relevantly states the following in this regard: The definition had been amended on several occasions before 1967 in attempts to remedy certain deficiencies. It was held in relation to prior definitions of "dividend" that they contemplated a dividend received from a company in respect of a share which remained in existence and that a distribution made in the course of extinguishing or cancelling a share was not a dividend within the meaning of the definition. This was first laid down in regard to the definition as it stood prior to the 1936 Act in Thornett v FC of T (1938) 4 ATD 551 and in regard to the definition of "dividend" in s 11(b) of the NSW Income Tax (Management) Act 1928 in C of T (NSW) v Stevenson (1937) 4 ATD 415. A similar decision in regard to the former definition of "dividend" contained in the 1936 Act was given in Blakely v FC of T (1951) 9 ATD 239. [At 20-280] The above discussion relates to the relevant law as it stood immediately after the High Court case of FC of T v Uther [(1965) 13 ATD 542]. At that stage, the proceeds from the redemption of shares were treated as non-dividends by the courts. That is, the proceeds were treated as the undissected proceeds from the realisation of a capital asset (this is the 'shareholder approach' - as discussed below). Eventually, the definition of 'dividend' was amended such that the proceeds from the redemption of shares, such as in the current case would constitute assessable dividends. A. H. Slater [in Law and taxation of company distributions in Australia (CCH Australia Limited 1982)] points out that the legislature has responded to court decisions such that, whereas at one point in time, a redemption of shares in a company would not have constituted a 'dividend', legislative amendments post the High Court case of FC of T v Uther meant that they would. In the current case: The Redemption Proceeds were a 'distribution' for the purposes of the section 6(1) of the ITAA 1936 definition of 'dividend' [as it read prior to being amended by the Taxation Laws Amendment (Company Law Review) Act 1998 ]; and The excess of the Redemption Proceeds over the Subscription Amount: Is effectively included as a 'dividend' as it satisfies neither of paragraphs (d) or (e) of the relevant definition of 'dividend' (i.e., the excess does not have the quality of 'share capital' but that of 'profits'); Are 'profits' for the purposes of subsection 44(1) as they are deemed by paragraph 44(1B)(b) [as inserted by the Income Tax Assessment Act (No. 4) 1967 (No. 85, 1967) and as it read prior to being amended by the Taxation Laws Amendment (Company Law Review) Act 1998 ] to be paid out of profits and thus satisfy the requirements of subsection 44(1); and Is a 'dividend' paid to a shareholder by a company out of profits derived by it from any source and, therefore, is an assessable income of the Trustee for the purposes of paragraph 44(1)(a)(i). | Detailed Reasoning - Question 2: If so, will the dividends be attributable to sources in Australia for the purposes of section 97 of the ITAA 1936? | Summary: The dividend income in the hands of the Trustee has a foreign source. The distributed dividend income in the hands of a beneficiary of the Trust will have a foreign source. | Detailed Reasoning - Detailed reasoning: [ It should be noted that this question does not require Subdivision 207-B of the ITAA 1997, which relates to the streaming of franked dividend, to be considered.] Subsection 97(1) of the ITAA 1936 relevantly provides that a beneficiary of a trust estate that is presently entitled to a share of the income of the trust estate must include in their assessable income: (i) So much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and (ii) So much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia The question to be answered by the Commissioner requires a stepped process consisting of determining: The source of the dividend income in the hands of the Trustee; and The source of the dividend income distributed to the beneficiary of the Trust. The source of the dividend income in the hands of the Trustee The source of a dividend is the place where the company made the profits out of which the dividend is paid: Nathan v FCT (1918) 25 CLR 183, approved and applied in Esquire Nominees Ltd (as Trustees of the Manolas Trust) (1971-1973) 129 CLR 177; (1973) 4 ATR 75, in which the court rejected DCT (NSW) v Freeman (1956) 30 ALJ 42; 6 AITR 225. The location of the fund of profits distributed by means of a dividend is the place (or places) where the profits are made; if made in more than one place, apportionment may be required. The only relevant fund of profits is the fund of profits of the company that pays the dividend; reference should not be made to the profits of another company, even if it is possible to trace a chain of successive distributions by more than one company: Esquire Nominees Ltd (as Trustees of the Manolas Trust) (1971-1973) 129 CLR 177; (1973) 4 ATR 75. The profits which were distributed by the Offshore Feeder Funds to the Trustee were made where these companies were located, i.e., in either the Cayman Islands or British Virgin Islands. As such, the profits, and the dividends, have a foreign source. The source of the dividend income distributed to the beneficiary of the Trust The effect of subsections 6B(1), 6B(2A) and 6B(3) of the ITAA 1936 is that the foreign source dividend income of Trustee will constitute foreign source dividend income of a beneficiary upon a conferral of present entitlement of such income for the purposes of subsection 97(1) of the ITAA 1936. Paragraphs 3 and 4 of IT 2555 [ Income tax : foreign tax credit system - foreign tax credit entitlement of corporate beneficiaries of trusts ] confirm this treatment: 3. Subsection 6B(1) of the Income Tax Assessment Act (the Assessment Act) specifies that where a person (including a company) derives income through a trust, and the trust income comprises dividend income, that person is deemed to derive income attributable to dividend income. Subsection 6B(2A) of the Assessment Act identifies the source of income derived by a beneficiary through a trust, and taken together, subsections 6B(1) and (2A) operate so that where a beneficiary derives income attributable to dividend income of a trust, the beneficiary is deemed to have derived the income from the same source as the trust. 4. Thus, where a dividend is effectively derived by an Australian company from a foreign company through an interposed trust estate; those provisions operate so that the Australian company is deemed to have derived an amount of foreign income attributable to that dividend income. | Detailed Reasoning - Question 3: Are gains and losses on the Offshore Feeder Fund investments (that do not form part of the dividend) on revenue account for tax purposes? | Summary: Consideration of the factors in TD 2011/21 point to, and support, a conclusion that the profits made by the Trustee are on revenue account. | Detailed Reasoning - Detailed reasoning: TD 2011/21 [Income tax: does it follow merely from the fact that an investment has been made by a trustee that any gain or loss from the investment will be on capital account for tax purposes?] it relevantly provides that: | Detailed Reasoning - Ruling: 1. … The mere fact that a gain or loss from an investment is made by an entity in its capacity as trustee of a trust is not conclusive as to whether the gain or loss is on revenue or capital account for tax purposes. 2. The gain or loss is on revenue account for tax purposes if no provision of the income tax law specifically treats it as being on capital account and, after a wide survey and exact scrutiny of all of the relevant factors, it is determined that the gain or loss was from: A normal operation in the course of carrying on a business of investment; An extraordinary operation by reference to the ordinary course of that business but one entered into with the intention of making a profit or gain; or A one-off or isolated transaction where the investment was acquired in a business operation or commercial transaction for the purpose of profit-making. 3. The nature of the trust and the terms and content of the trustee's duties are important considerations in the characterisation process. However they are not necessarily determinative in any particular case. They must be carefully weighed together with other factors. 4. Other factors which would assist in determining whether the gain or loss is on revenue or capital account include; The nature and scale of the trustee's investment and other activities; The investment style employed in respect of the trust assets; The nature of the trust assets; The length of time individual investments are held, the regularity in sale activity involving the trust assets; The average annual turnover of the trust assets; The percentage of total income which the gains represent; and The nature of any connection between the trustee and other parties to the dealings. The Trustee has widely drawn powers under Trust Deed. The Trust Deed does not contain specific details as to the circumstances that shares in the Offshore Feeder Funds are to be bought and sold. The relevant evidence supports a conclusion that the profits are made on revenue account: The Trustee currently has $X million invested in Offshore Hedge Funds; The Trust exists with a view to generating profits from the redemption of Offshore Hedge Fund shares from which distributions to investors can be made; The profits on the redemption of Offshore Hedge Fund shares constitutes 100% of the net income of the Trustee; The nature of the assets comprising the Trust fund (shares in hedge funds); The professional expertise of the Trustee and its advisors Consideration of the factors in TD 2011/21 point to, and support, a conclusion that the profits made by the Trustee are on revenue account. On the contrary, there is little to no evidence to support a conclusion that the investments are held on capital account, i.e., that the trustee is authorised or directed to ensure that the value of the assets under its control, including any increments thereto, are preserved for the long term in order, for example, to provide lifetime support for an incapacitated person. | Detailed Reasoning - Question 4: Is any FX Gain or Loss in respect of the initial investment regarded as having a foreign source? | Summary: Any FX Gain or Loss in respect of the initial investment will be regarded as having a foreign source. | Detailed Reasoning - Detailed reasoning: An FX Gain or Loss is the difference between the Australian currency amount of the Subscription Amount at the Subscription Time and the Australian currency amount of the Redemption Proceeds at the Redemption Time. It is noted that any FX Gain or Loss would, apart from the 'revenue account' intervention, ordinarily be subsumed into the application of the CGT provisions. That is, in the current circumstances the shares in the Offshore Feeder Funds, are simultaneously CGT assets (to which CGT event C2 happen upon redemption) and revenue assets. As such, as detailed in Question 7, below (relating to the anti-overlap provision in subsection 118-20(1) of the ITAA 1997), the revenue account treatment will take precedence over the CGT provisions. Paragraph 2.10 of the EM which accompanied the New Business Tax System (Taxation of Financial Arrangements) Bill (No. 1) 2003 (which introduced the 'forex provisions' in Division 775 and Subdivisions 960-C and 960-D of the ITAA 1997) relevantly states that: 2.10 The general principle is that foreign currency gains are included in an entity's assessable income, and foreign currency losses are deductible. Gains and losses of this nature are treated as being on revenue account. Where they are brought to account under Division 775, they are referred to as 'forex realisation gains' and 'forex realisation losses'. A FX Gain Loss for current purposes will not be affected by Division 775 and will be on revenue account as the underlying transaction (the redemption of the shares in the Offshore Feeder Funds) with which they are connected, and any associated profit or loss, is made on revenue account ( FC of T v. Hunter Douglas Ltd 83 ATC 4562 ((1983) 14 ATR 629); International Nickel Australia Ltd v F C of T (1977) 137 CLR 347 and Avco Financial Services Ltd v F C of T (1982) 150 CLR 510) [Refer to Question 3]. The source, for Australian income tax purposes, of an FX Gain or Loss in the circumstances outlined in the scheme that is the subject of this ruling, will be the place where redemption agreement (the underlying transaction) is formed (TR 2014/7 and PCG 2016/6). In this regard ATO ID 2010/54 [ Income Tax Capital Gains Tax: foreign source capital gains made by a resident trust for CGT purposes ] relevantly provides that: 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. Starke J said that the relevant source rule is where a business habitually enters into and carries out those contracts with a view to profit. Although these cases relate to profits that are ordinary income, we consider that similar principles apply in determining the source of a capital gain included in the calculation of a net capital gain. Thus, where shares are sold using an offshore broker, the buying and selling is undertaken and thus sourced, where the contract is concluded. We consider that the decisions by the trustee to sell the shares are incidental to the activities that actually realise the profits. In the case at hand to exit an investment the following occurs: The investor has a right to redeem their shares for the net asset value per share. For liquidity reasons, there are often restrictions on redemptions. Redemption is effected by the investor lodging a redemption notice and, if/to the extent redemption is accepted, the relevant shares being removed from the register of members. A confirmatory notice would be issued to the investor following redemption. There typically is a delay of at least some days between the time at which redemption occurs (i.e. when the relevant shares are removed from the register) and the time at which the Trust receives the redemption proceeds. The share redemption process indicates that a successful redemption request is contingent upon it being accepted by the Offshore Feeder Fund. As such, the redemption of the shares is being completed in either the Cayman Islands or the British Virgin Islands and will have a foreign source as a result. Any FX Gain or Loss would occur in connection with a specific redemption so it follows that they will also have a foreign source. | Detailed Reasoning - Question 5: Does any FRE2 Gain or Loss arising on receipt of redemption proceeds have a foreign source? | Summary: Any FRE2 Gain or Loss arising in on receipt of redemption proceeds will be regarded as having a foreign source. | Detailed Reasoning - Detailed reasoning: Where Division 230 of the ITAA 1997 does not apply (as in this case), Division 775 is relevant to the foreign realisation gains and losses. FRE2 happens when a taxpayer ceases to have a right, or part of a right, to receive foreign currency, and the right or the part of the right is created or acquired in return for the taxpayer paying an amount of Australian currency or foreign currency (see paragraph 775-45(1)(a) and subparagraph 775-45(1)(b)(iii) of the ITAA 1997). FRE2 is designed to capture the forex movement between the period when a “right to receive foreign currency” triggers a taxing point and when it is actually received by the taxpayer. It has been assumed that neither of sections 775-70 or 775-75 of the ITAA 1997 (which relate to short-term forex realisation gains) have application to the scheme facts. Consequently, a FRE2 Gain or Loss will be on revenue account as per subsection 775-15(1) and subsection 775-30(1) of the ITAA 1997 respectively. For the same reasons which led to the conclusion in relation Question 4, above, any FRE2 Gain or Loss arising on receipt of redemption proceeds will be regarded as having a foreign source. | Detailed Reasoning - Question 6: Does any FX Loss and any FRE2 Loss reduce dividend income in computing the net income of the Trust that is not attributable to sources in Australia? | Summary: The section 95 of the ITAA 1936 net income of the Trustee will be calculated by deducting allowable deductions (including a FX Loss and a FRE2 Loss) from total assessable income (including dividend income under subsection 44(1) of the ITAA 1936). | Detailed Reasoning - Detailed reasoning: It has been assumed that neither of sections 775-70 or 775-75 of the ITAA 1997 (which relate to short-term forex realisation gains) have application to the scheme facts. Consequently, a FRE2 Loss will be on revenue account and deductible as per subsection 775-30(1) of the ITAA 1997. As per Question 4, a FX Loss will also be on revenue account and deductible (as per Taxation Determination TD 2011/21). The section 95 net income of the Trustee will be calculated by deducting allowable deductions (including a FX Loss and a FRE2 Loss) from total assessable income (including dividend income under subsection 44(1) of the ITAA 1936). | Detailed Reasoning - Question 7: Is any capital gain arising to the Trust in respect of a FX Gain or a dividend reduced by the amount included in assessable income in relation to a FX Gain or dividend by application of s 118-20 of the ITAA 1997? | Summary: Subsection 118-20(1) of the ITAA 1997 will apply to reduce the capital gain made when CGT event C2 happens on the redemption of the shares in the Offshore Feeder Funds thus preventing double taxation of the amount included in the taxpayer's assessable income. | Detailed Reasoning - Detailed reasoning: Anti-overlap provision The anti-overlap provisions in section 118-20 of the ITAA 1997 apply to reduce a capital gain to the extent that because of a CGT event an amount is otherwise included in assessable income or exempt income under another provision of the ITAA 1997 or the ITAA 1936. Paragraph 118-20(1)(a) relevantly provides that, '…A capital gain you make from a CGT event is reduced if, because of the event, a provision of this Act (outside of this Part) includes an amount (for any income year) in: (a) your assessable income…' Upon the redemption of shares in the Offshore Feeder Funds CGT event C2 in subsection 104-25(1) of the ITAA 1997 happens as an intangible CGT asset, the shares, end by the asset being redeemed. A capital gain will arise if the capital proceeds from the ending are more than the right's cost base: subsection 104-25(3) of the ITAA 1997. As explained, above, the same event could also cause: A FX Gain if the Australian currency amount of the Subscription Amount at the Subscription Time is exceeded by the Australian currency amount of the Redemption Proceeds at the Redemption Time; and An assessable dividend to be included in the assessable income of the Trustee under subsection 44(1)(a) of the ITAA 1936; Accordingly, subsection 118-20(1) of the ITAA 1997 will apply to reduce the capital gain made when CGT event C2 happens on the redemption of the shares in the Offshore Feeder Funds thus preventing double taxation of the amount included in the taxpayer's assessable income [ATO ID 2008/110 is a relevant precedential ATO view in this regard].

Question 1: Will the excess of the Redemption Proceeds over the Subscription Amount (both amounts determined in the currency in which the Offshore Feeder Fund shares are denominated) in relation to the redemption of shares in Offshore Feeder Funds in the income year ended 30 June 2015 constitute an assessable dividend under section 44 of the ITAA 1936?