Private ruling: Resident trust estate
Date of advice: 6 March 2020
Published: April 2020
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the Trust a resident trust estate of Australia? | A1: No.

Relevant facts and circumstances: The Trust was established by deed on XX/XX/XXXX in a foreign country. The Trust Deed appointed Person A as sole trustee of the Trust. At all times, Person A was a resident of a foreign country. One of the beneficiaries was an Australian resident, Person B. The Trust Deed grants Person A the power to appoint additional trustees during their lifetime. After Person A's death, Person C was to be appointed as trustee. At all times, Person C was a resident of the foreign country. The Trust Deed provides that the removal and appointment of trustees is to be effected by deed. The Trust Deed gives Person A or any trustee the power to appoint a Power of Attorney to act in conduct and manage their affairs in connection with the Trust. Person A directed that the Trust funds be invested in Australian Bank term deposits. In order to facilitate the rollover of those deposits, Person A appointed Person B to act as their Australian Power of Attorney on XX/XX/XXXX. After Person A's death, in accordance with the Trust Deed, Person C was appointed trustee of the Trust. Person C appointed Person B as their Australian Power of Attorney to operate the Australian Bank term deposits in line with Person A's original investment strategy. No distributions have been made to any of the beneficiaries of the Trust. Person B's role has been limited to rolling over the Australian Bank term deposits as they matured. Person C will now wind up the Trust and distribute the funds to the beneficiaries in accordance with the Trust Deed.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 6 | Income Tax Assessment Act 1936 Section 95

Reasons for decision: Summary: Person B was not a trustee of the Trust and the central management and control of the Trust has been in the foreign country at all times. Therefore, the Trust is not considered to be a resident trust estate of Australia in any of the relevant income years. | Detailed Reasoning - Detailed reasoning: Subsection 95(2) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that a trust estate shall be taken to be a resident trust estate for the purposes of Division 6 of Part III of the ITAA 1936 in relation to an income year if: · a trustee of the trust estate was a resident at any time during the year of income, or · the central management and control of the trust estate was in Australia at any time during the year of income. A non-resident trust is one that is not a resident trust (subsection 95(3) of the ITAA 1936). Section 6 of the ITAA 1936 further provides that a trustee, in addition to every person appointed or constituted by act of parties, by order, or declaration of a court, or by operation of law includes: · an executor or administrator, guardian, committee, receiver, or liquidator, and · every person having or taking upon himself the administration or control of income affected by any express or implied trust, or acting in any fiduciary capacity, or having the possession, control or management of the income of a person under any legal or other disability. Person A, and after their death, Person C, acted as trustee of the Trust. Both were residents of the foreign country. Person B was not appointed as trustee of the Trust as appointment of an additional trustee required the execution of a deed, which was not done. Additionally, it is not considered Person B is a trustee under the expanded definition in section 6 of the ITAA 1936, as merely acting as an agent under a Power of Attorney will not be sufficient. It is therefore necessary to consider whether the central management and control of the Trust estate was in Australia at any time during the relevant income years. The concept of central management and control is usually relevant to corporate tax residence and there has not been a decision directly on it by an Australian court in relation to trusts. However, what constitutes central management and control of a trust was considered in Fundy Settlement v Canada , 2012 SCC 14, [2012] 1 S.C.R. 520 ( Fundy ), where the Supreme Court of Canada held that: As with corporations, the residence of a trust should be determined by the principle that a trust resides for the purposes of the Income Tax Act where its real business is carried on, which is where the central management and control of the trust actually takes place. The residence of the trust is not always that of the trustee. It will be so where the trustee carries out the central management and control of the trust where the trustee is resident. Here, however, the trusts are resident in Canada, since the central management and control of the trusts was exercised by the main beneficiaries in Canada and the trustee's limited role was to provide administrative services and it had little or no responsibility beyond that. Fundy was mentioned in passing by the High Court in Bywater Investments Limited & Ors v. Commissioner of Taxation; Hua Wang Bank Berhad v. Commissioner of Taxation [2016] HCA 45; 2016 ATC 20-589 ( Bywater ) at [84]. Taxation Ruling TR 2018/5: Income tax: central management and control test of residency (TR 2018/5) sets out the guidelines for determining the central control and management of a company. Paragraphs 11 to 13 state: 11. The key element in the control and direction of a company's operations is the making of high-level decisions that set the company's general policies, and determine the direction of its operations and the type of transactions it will enter ( Bywater at [41]). 12. The control and direction of a company is different from the day-to-day conduct and management of its activities and operations ( Bywater, Koitaki v. FCT (1941) 64 CLR 241 ( Koitaki ) at 28). The day-to-day conduct and management of a company's activities and operations is not ordinarily an act of central management and control ( Bywater ; Koitaki at 248.). Nor is the management of day-to-day activities under the authority and supervision of higher-level managers or controllers ( Bywater ; Koitaki at 248). 13. The day-to-day conduct and management of a company's operations might be an exercise of central management and control in circumstances where they are effectively the same. For example, for a small passive investment company with a very small number of investments, the decisions to make, hold and dispose of those investments, would be both the day-to-day management and the central management and control of the company ( Wood v. Holden (Inspector of Taxes ) [2006] EWCA Civ 26; Fundy ). Decision making does not include the mere implementation, or rubberstamping, of decisions made by others (paragraph 15 of TR 2018/5). Exercising central management and control can involve setting investment and operational policy, appointing agents and granting them power to carry on business and overseeing and controlling those appointed to carry out the day-to-day business (paragraph 16 of TR 2018/5). The nature of a company's activities and business define which acts and decisions are an exercise of the central management and control of that company. For example, where a company is a special purpose vehicle set up to conduct only two transactions - to buy and sell an asset - the decisions to buy and sell will be the only activities relevant to its central management and control (paragraph 18 of TR 2018/5). A person may control and direct a company without actively intervening in the company's affairs on an ongoing basis provided they: · have appointed agents or managers whom they tacitly control to conduct the company's day-to-day business, · tacitly control and regularly exercise oversight of the affairs of the company, including monitoring the company's performance, and · do not need to actively intervene because the company's affairs are running smoothly in the manner they desire (paragraph 24 of TR 2018/5). Applying the above principles, The Trust was established as a discretionary investment trust so the decisions regarding the investment of trust property are an exercise of central management and control. While Person B was appointed as Power of Attorney for the trustees, the investment strategy was set forth by Person A, who was a resident of the foreign country. After Person A's death, Person C appointed Person B as Power of Attorney to continue the original investment strategy. Person C has now made the decision to wind up the Trust. After weighing the factors set forth in TR 2018/5, it is considered that the central management and control of the Trust was in the foreign country. The requirements of subsection 95(2) of the ITAA 1936 have not been met and the Trust is not a resident trust estate of Australia.