Private ruling: Trust distributions and capital gains tax
Date of advice: 11 December 2018
Published: April 2019
Ruling period: Year ended 30 June 2019
Date scheme commenced: 1 July 2017

Ruling: Q1: Will the capital gain made by the Taxpayer under CGT event E4 be disregarded pursuant to Division 855 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: There is an Australian unit trust. The Unitholder in the Trust is a non-resident company. Cash is the majority asset held by the Trust. The Trust will make a distribution of an amount that is otherwise not taxable to the Unitholder. After applying the Unitholder’s cost base in the units, there will be a capital gain under CGT event E4

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-70 Section 104-71 of the ITAA 1997 | Division 855 of the ITAA 1997

Reasons for decision: Summary: The Trust will distribute the capital of the trust to its sole unitholder, a non-resident company. The amount distributed is not otherwise subject to tax in the hands of the unit holder and the capital gain amount is attributed to Australian sources triggering a CGT event E4 (section 104-70 of the ITAA 1997 less any amounts disregarded due to the application of section 104-71 of the ITAA 1997). As the unitholder is a non-resident under Division 855 of the ITAA 1997 it may be able to disregard a capital gain from CGT event E4. Section 855-10 of the ITAA 1997 provides that a taxpayer can disregard a capital gain (or loss) from a CGT event if: ● The taxpayer is a foreign resident (or the trustee of a foreign trust) just before the CGT event happens; and ● The CGT event happens in relation to a CGT asset that is not taxable Australian property. Taxable Australian property includes “indirect Australian real property interests” as defined in section 855-25 of the ITAA 1997. A membership interest in an entity is an indirect Australian real property interest at that time if: ● The interest passes the non-portfolio interest test at that time, or within a specified period of time; and ● The interest passes the principal asset test at that time. As the Unitholder has been the sole unitholder in the Trust at all relevant time it will pass the non-portfolio test. The principal asset test is contained in section 855-30 of the ITAA 1997. Subsection 855-30(2) of the ITAA 1997 states: A membership interest held by an entity (the holding entity) in another entity (the test entity) passes the principal asset test if the sum of the market values of the test entity’s assets that are taxable Australian real property exceeds the sum of the market values of its assets that are not taxable Australian real property. As at the time of the CGT event the majority asset of the Trust is cash and cash is not taxable Australian real property the principle asset test will not be passed. Consequently, the units are not taxable Australian property and the conditions in section 855-10 of the ITAA 1997 will be satisfied resulting in the capital gain made by the unitholder being disregarded.