Private ruling: Sale of foreign property
Date of advice: 9 June 2017
Published: October 2017
Ruling period: Financial year ended 30 June 2017 | Financial year ended 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Question and answer | Is a distribution of income from a non-resident trust included in your assessable income? | Yes | Is a distribution of capital from a non-resident trust included in your assessable income? | No

Relevant facts and circumstances: The Property You acquired a residential property in a foreign location The property was acquired in the financial year ended 30 June 1989. The property was your primary residence for the over 11 years. During the financial year ended 30 June 2000, as part of a divorce settlement, you moved the property into a trust. You moved to Australia and became a resident for tax purposes in the financial year ended 30 June 2001. At the time no visa was required. The property was professionally managed by a local real estate agent. You propose to sell the property and wind up the trust. The Trust The Trust has 2 trustees, one being you who is located in Australia, the other is in the foreign location. The Trustee located in foreign location is your accountant and friend, he is responsible for the upkeep of the rental property through the use of a property manager. The property has very little management. There is a total of 8 discretionary beneficiaries The amounts from the Trust will be paid in proportional percentages as if it were a unit trust.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 95(2)) | Income Tax Assessment Act 1936 subsection 99B | Income Tax Assessment Act 1997 subsection 6-5(2) | Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 section 115-25 | International Tax Agreements Act 1953

Reasons for decision: Summary: Under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) a resident of Australia is assessable on their worldwide income. | Detailed Reasoning - Residency status of the Trust: Normally the residency status of a trust is not relevant as an Australian resident would be assessable on a distribution from a trust regardless of whether the trust is an Australian resident or a non-resident trust. However, sometimes the Double Tax Agreement (DTA) between two countries stipulates which country has the taxing right, depending on the source of income. Under subsection 95(2) of the Income Tax Assessment Act 1936 (ITAA 1936), a trust is a resident of Australia in relation to a year of income if: (a) a trustee of the trust was a resident at any time during the year of income; or (b) the central management and control of the trust estate was in Australia at any time during the year of income. In this case, there are two trustees of the Trust, one who is a resident of the foreign location and you, who is resident in Australia. The property will be sold by the Trust in either the 2017 or 2018 financial years. As there is at least one trustee who is an Australian resident in the 2017 and 2018 income year, the Trust is an Australian resident for Australian tax law purposes. However, as one of the trustees is a resident of the foreign location in the 2017 and 2018 income years, we need to consider the Double Tax Agreement between Australia and the foreign location. | Detailed Reasoning - DTA – residence – non-individuals: The DTA operates to avoid the double taxation of income received by Australian and residents of the foreign location. An Article of the DTA provides that where a person other than an individual is a resident of both countries, it will be deemed to be a resident solely of the country in which its place of effective management is situated. In this case the Trust deed was drawn up in the foreign location. Your foreign accountant in his capacity of trustee is managing the day to day activities of the Trust. Thus for the purposes of the DTA, the place of 'effective management’ is in the foreign location and thus the Trust is a resident of the foreign location. | Detailed Reasoning - Disposal of property by Trust: Article 13 of the DTA deals with the allocation of taxing rights between the foreign location and Australia in respect of income or gains derived from the disposition of property. Article 13(5) of the Agreement provides that gains of a capital nature from the alienation of any property shall be taxable only in the country in which the alienator is a resident. As the Trust is the entity which disposed of the property and the Trust is a resident of foreign location for the purposes of the DTA, the Trust is only assessable on the capital gain on sale in the foreign location. | Detailed Reasoning - Assessability of trust distribution: As a general rule a beneficiary who is not under a legal disability and who is presently entitled to a share of the income of a trust must include in their assessable income their share of the net income of the trust estate (section 97 of the ITAA 1936). Subdivision 115-C of the ITAA 1997 sets out rules that affect the calculation of a beneficiary’s net capital gain if the beneficiary is assessed on a share of the net income of the trust which includes a capital gain. However, as the capital gain is only assessable in foreign location under the DTA, subdivision 115-C of the ITAA 1997 has no application. You will receive a distribution from the Trust. The DTA does not deal specifically with the assessability of trust distributions. Thus we need to turn to Article 21 of the DTA, entitled 'Other income’. The Trust will make a gain as a result of the sale of the property. According to Article 21, where a resident of Australia for tax purposes receives a distribution from a foreign location trust, the distribution may be assessed in Australia. There are a number of Australian income tax provisions that may make the distribution from the Trust assessable to you. One of the provisions is contained in section 99B of the ITAA 1936. Subsection 99B(1) of the ITAA 1936 provides that where, during a year of income, a beneficiary who was a resident at any time during the year is paid a distribution from a trust, or has an amount of trust property applied for their benefit, that amount is to be included in the assessable income of the beneficiary. Subsection 99B(2) of the ITAA 1936 modifies the rule in subsection 99B(1) and has the effect that the amount to be included in assessable income under subsection (1) is not to include any amount that represents: (a) corpus of the trust, but an amount will not be taken to represent corpus to the extent that it is attributable to income derived by the trust which would have been subject to tax had it been derived by a resident taxpayer; (b) amounts that would not be included in assessable income of a resident taxpayer if they had been derived by that taxpayer; (c) amounts that have been or will be included in the assessable income of the beneficiary under section 97 of the ITAA 1936 or have been liable to tax in the hands of the trustee under sections 98, 99 or 99A of the ITAA 1936; or (d) amounts included in assessable income under section 102AAZD of the ITAA 1936. By receiving a distribution of proceeds from the Trust you will need to include the amounts of income such as previously undistributed rental amounts assessable under section 99B of the ITAA 1936 once the amounts are distributed. Under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) a resident of Australia is assessable on their worldwide income.