Private ruling: Foreign Trust - residency
Published: June 2012
Ruling period: Year ending 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015

Ruling: Q1: Are Trust A and Trust B considered an Australian resident trust from the period the sole trustee arrived in Australia? | A1: Yes. | Q2: Will the Trusts be considered a non resident trust upon the death of the sole trustee? | A2: Yes | Q3: Will there be a Capital Gains Tax (CGT) event and the Trusts liable for CGT upon the death of the sole trustee? | A3: Yes CGT Event I2.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The Trust was set up in country X. You have provided a copy of the family trust agreement. The related parties created the Trust as trustors and the first co-trustees of the Trust. The creator of the Trust is an official firm. The initial capital assets consist of property, money market funds, etc. the trustors transferred all their assets to the Trust. The Trust pays their personal expenses. All the income is retained in the Trust. Upon the death of one of the trustors the Trust was split into two parts A & B, each trust with different beneficiaries. Trust A and Trust B (Trusts) will be fully paid out after the death of the final trustor, the sole trustee. The sole trustee is the only one drawing income from the Trusts, but at their death, the Trusts will be distributed to the children. The sole trustee is a citizen of Country X and files a tax return in the Country X. The sole trustee arrived in Australia from Country X on an investor retirement visa - subclass 405. Under this visa, the individual must have sponsorship from an Australian State government, where a designated investment will be made and they are required to have their assets available for transfer to Australia. They have no entitlements to social security or Medicare benefits in Australia and must have a private health insurance package. It is stated that the significant portion of assets was acquired for the 405 visa (held in Australian Treasury Bonds) and that additional assets were brought to Australia as investments. The sole trustee is considered a resident of Australia for tax purposes from the date of arrival. You maintain a residence in Australia which you live in and you do not have a residence you maintain in Country X. You have provided a copy of the amendment to the Trust agreement made in Country X. The Law Office in Country X will act as the trustee of the Trusts upon the death of the sole trustee. The sole trustee manages the trust in Australia making all the investment decisions The Trusts derives interest (accrued in both Australia and Country X) and pensions. Trust deed provides appointment of a new trustee at the time of death of the sole trustee. The new trustee will be a resident of Country X and the management and the control of the trust moves to Country X.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 6B(2A) | Income Tax Assessment Act 1936 section 95 | Income Tax Assessment Act 1936 section 95(2) | Income Tax Assessment Act 1997 section 97 | Income Tax Assessment Act 1936 section 98 | Income Tax Assessment Act 1936 section 99 | Income Tax Assessment Act 1936 section 99A | Income Tax Assessment Act 1997 subsection 6-15(3) | Income Tax Assessment Act 1997 subsection 768-910 | Income Tax Assessment Act 1997 section 855-10 | Income Tax Assessment Act 1997 section 855-15 | Income Tax Assessment Act 1997 subsection 855-25(1) | Income Tax Assessment Act 1997 section 960-190 | Income Tax Assessment Act 1997 section 960-195 | Income Tax Assessment Act 1997 section 995-1 | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Detailed Reasoning - Residency of trust: Section 95(2) in Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936) defines a resident trust for the purposes of Division 6, as follows: A trust is a resident of Australia for an income year if: (a) the trustee of the trust estate was a resident at any time during the income year; or (b) the central management and control of the trust estate was in Australia at any time during the income year. A trust estate that is not a resident trust estate in relation to a year of income is a non-resident trust estate. We therefore need to determine the residency of the sole trustee. Section 855-50 of the ITAA 1997 provides that when a trust becomes a resident trust for CGT purposes, except for Taxable Australian Property (TAP), you are deemed to have acquired the other assets at the market value at the time the trust becomes a resident trust. In your case, the trusts will be deemed to have acquired the assets (except the TAP) at the time the sole trustee became a resident of Australia. | Detailed Reasoning - Residency of the sole trustee: From the information you have provided you are considered to be a resident not only of Australia but also of Country X according to Article 4(1) (a) and (b) of the Convention. For the period of dual residency, it is necessary to consider the tie breaker rules in the Convention. Article 4(2) of the Convention sets out the tie breaker rules for residency for individuals. The tie breaker rules ensure that the individual is only treated as resident of one country for the purposes of working out liability to tax on their income under the Convention. The tie breaker rules do not change a taxpayer's residency status for domestic law purposes. Article 4(2) of the Convention provides that if an individual is a resident of both Australia and Country X, they shall be deemed to be a resident of the State: a) in which they maintain a permanent home b) if the provisions of (a) do not apply, in which they have an habitual abode, or c) if the provisions of (a) and (b) do not apply, with which their personal and economic relation are closer. The terms 'permanent home', 'habitual abode' and 'personal and economic relations' are otherwise undefined in the Convention. Article 3(2) of the Convention provides that any term not defined shall, unless the context otherwise requires, have the meaning which it has under the law relating to taxes of the country applying the Convention. Taxation Ruling TR 2001/13 discusses the Commissioner's views about interpreting double tax agreements. Paragraph 104 of TR 2001/13 provides that the OECD Model Tax Convention and Commentary will often need to be considered in interpreting double tax agreements. The OECD Commentary provides that in relation to a 'permanent home': (a) for a home to be permanent, an individual must have arranged and retained it for his or her permanent use as opposed to staying at a particular place under such conditions that it is evident that the stay is intended to be of short duration. The dwelling has to be available at all times continuously and not occasionally for the purposes of a stay, which owing to the reasons for it is necessarily of short duration (eg travel for pleasure, business travel, attending a course etc) (b) any form of home may be taken into account, including a house or apartment belonging to or rented by the individual and a rented furnished room In your case, you maintain a home in which you live in Australia and you do not have a home in Country X. Accordingly, you will be treated solely as a resident of Australia for the purposes of applying the provisions of the Convention. In this case, you have stated that the sole trustee of Trust A and Trust B (Trusts), maintains the role of sole trustee until they pass away. The Trusts are considered an Australian resident trust (from the time the sole trustee became an Australian resident) until they pass away. | Detailed Reasoning - Event of death of the sole trustee: The Trust deed provides appointment of a new trustee at the time of death of the sole trustee. The new trustee will be a resident of Country X and the management and the control of the trust moves to Country X. Accordingly, from date of death the trust will deemed to be a non resident of Australia | Detailed Reasoning - Capital gains tax: A capital gain or capital loss can only arise if a CGT event happens to an asset in which you have an ownership interest. A CGT asset is any kind of property, or a legal or equitable right that is not property. | Detailed Reasoning - Trust ceasing to be an Australian resident: When the trust ceased to be a resident trust for CGT purposes, CGT event I2 happens (subsection 104-170(1) of the ITAA 1997). Subsection 140-170(3) states that trust needs to work out if it had made a gain or a loss for each CGT asset that it owned (in the capacity as trustee of the trust) just before the time of the event except one that is Taxable Australian Property. The trust will make a capital gain if the market value of an asset is more than its cost base, and it will make a capital loss if that market value is less than the reduced cost base (subsection 104-170(4) of the ITAA 1997). The rulee should have determined any net capital gain or net capital loss in relation to the shares at this time. Taxable Australian property includes: · a direct interest in real property situated in Australia; · a CGT asset that you have used at any time in carrying on a business through a permanent establishment in Australia; and · an indirect Australian real property interest which is an interest in an entity where you and your associates hold 10% or more of the entity. | Detailed Reasoning - Double Taxation Agreement (Australia/United States of America): The tax treaty between Country X and Australia (the Convention) operates to avoid the double taxation of income received by Australian residents from sources in country X and vice versa. | Detailed Reasoning - Alienation of property: Article 13 of the Convention deals with the allocation of taxing rights between the two countries in respect of income or gains derived from the disposition of property. Under paragraphs 1 and 2 of Article 13, income or gains derived by an Australian resident from the disposition of real property or a real property interest situated in Country X, may be taxed in Country X. Real property includes an interest in a partnership, trust or estate of a deceased individual, the assets of which consist wholly or principally of real property situated in Australia. However paragraph 5 permits where an individual who, upon ceasing to be a resident of Australia is treated under the taxation law of Australia as having alienated any property and is taxed in Australia, you may elect to be treated for the purposes of taxation in Country X as if you had, immediately before ceasing to be a resident of Australia alienated and re-acquired the property for an amount equal to its fair market value at that time. Paragraph 6 allows an election to defer taxation on income or gains relating to property which would otherwise be taxed Australia upon ceasing to be a resident Australia In your case, change of residency in Trust A and B upon the death of the sole trustee, CGT event I2 will happen unless an election is made. | Detailed Reasoning - Relief from Double Taxation: Article 22 of the Convention requires the country of residence to provide relief from double taxation of the capital gains derived by the taxpayer from the sale of the shares. Accordingly, Australia will provide a credit in respect of Country X tax paid ('a foreign income tax offset') by the taxpayer against Australian tax payable on the capital gains, subject to the requirements of Australia's foreign income tax offset legislative provisions being met. Further, for the purposes of Article 22 of the Convention and also pursuant to Australia's foreign income tax offset provisions, a foreign income tax offset is not available to the taxpayer to the extent of any subsequent refund of Country X tax paid | Detailed Reasoning - Business Profits: Article 7 (1) provides business profits by the Trusts will be taxable only in Australia unless the Trusts operated through a permanent establishment in Country X. (Paragraph 1) Permanent Establishment (PE) according to Article 5 (2) (a) is where the place of management is located. You have stated the sole trustee manages the trust in Australia making all the investment decisions. Hence the Trusts have a PE in Australia and business profits are taxable in Australia only. | Detailed Reasoning - Country X tax liability: You should contact Country X taxation authorities to determine your liability to taxation in that country. If your Australian sourced income is taxed in Country X, Article 22 of the Convention provides that a credit against Country X tax is available for tax paid in Australia in respect of that income. | Detailed Reasoning - Rates of tax: Rates of tax vary according to the circumstances of the trust and the beneficiary. The beneficiary presently entitled to income and not under any disability is subject to tax under section 97 of the ITAA 1936 at ordinary marginal rates of tax. For the financial year ending 30 June 2012, the ordinary marginal rates of tax for residents are Taxable income Tax on this income 0 - $6,000 Nil $6,001 - $37,000 15c for each $1 over $6,000 $37,001 - $80,000 $4,650 plus 30c for each $1 over $37,000 $80,001 - $180,000 $17,550 plus 37c for each $1 over $80,000 $180,001 and over $54,550 plus 45c for each $1 over $180,000 The trustee must resolve to distribute by the end of the tax year (30 June). If the trustee chooses not to allocate income to a beneficiary, but instead accumulate the income, all income to which no beneficiary is presently entitled, is usually assessed to the trustee at maximum marginal rates (45%) under section 99A of the ITAA 1936. Trusts have access to the general CGT discount (at 50%). Where a trust has derived income (including capital gains) a trust tax return is required to be lodged by the trustee resident in Australia. For more information, see the Guide to the taxation of trusts and Trust return instructions 2011 at www.ato.gov.au

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.