Private ruling: Capital gains tax
Date of advice: 29 June 2020
Published: July 2020
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Would a capital dividend received as part of the distribution from an overseas non-resident Trust, be excluded from the assessable income of the taxpayer pursuant to section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: No.

Relevant facts and circumstances: The Company is an Australian resident company and was a beneficiary of a Trust. The Trust was an overseas non-resident trust estate operating under a written trust deed (Trust Deed) and is not an Australian resident trust for taxation purposes. The Trust owned shares in six overseas companies that owned and operated businesses overseas. The assets in the trust are non-taxable Australian property (TAP). In or around 20XX, five of those companies were liquidated. In relation to four of those companies, the liquidators sold the businesses and other assets, setting out the capital gains the companies had made and the retained profits. This was declared in the final distributions in favour of the shareholders, including the Trust. The liquidators identified which distributions were from retained earnings and which were from the capital proceeds of the sales of the businesses, the latter being described as 'capital dividends'. The Trust received in foreign currency proceeds from the liquidators. The Trustee distributed the foreign currency to the Company, and the Company has included the full amount of the distribution in Australian dollars in the relevant income year of its tax return. Assumption The trustee treated the receipts as trust capital in accordance with the Deed of Trust

Relevant legislative provisions: Income Tax Assessment Act 1936 section 99B | Income Tax Assessment Act 1936 subsection 99B(1) | Income Tax Assessment Act 1936 paragraph 99B(2)(a) | Income Tax Assessment Act 1936 paragraph 99B(2)(b) | Income Tax Assessment Act 1936 section 47 | Income Tax Assessment Act 1936 section 47(1A) | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 section 104-135 | Income Tax Assessment Act 1997 subsection 104-135(6)

Reasons for decision: Summary: Subsection 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that where an amount, being property of a trust estate, is paid or applied for the benefit of a beneficiary during a year of income, and the beneficiary was a resident at any time during the year, that amount is included in the assessable income of the beneficiary. Paragraph 99B(2)(a) of the ITAA 1936 modifies the rule in subsection 99B(1) of the ITAA 1936 and has the effect that the amount included in assessable income under subsection (1) is reduced to the extent that the amount represents corpus of the trust estate, except to the extent to which the amount is attributable to amounts that would be assessable, if they were derived by a resident taxpayer. Liquidator distributions from the capital reserve account sourced from assets acquired prior to 20 September 1985 are, in some circumstances, not taxable as either a deemed dividend under section 47 of ITAA 1936, or a net capital gain under section 104-25 of Income Tax Assessment Act 1997 (ITAA 1997). Section 47 of ITAA 1936 specifically deems certain amounts to be dividends paid to the shareholders out of the profits derived by the Company. Specifically, subsection 47(1) of ITAA 1936 provides that: Distributions to shareholders of a company by a liquidator in the course of winding-up the company, to the extent to which they represent income derived by the company (whether before or during liquidation) other than income which has been properly applied to replace a loss of paid-up share capital, shall, for the purposes of this Act, be deemed to be dividends paid to the shareholders by the company out of profits derived by it. The use of the term 'income' in the context of subsection 47(1) of the ITAA 1936 has been interpreted in Gibb v FCT (1966) 118 CLR 628 as meaning income according to ordinary concepts rather than 'assessable income'. Hence, amounts that are deemed to be assessable income but are not of an income or revenue character are not considered, for the purposes of subsection 47(1) of ITAA 1936 to be 'income'. Subsection 47(1A) of the ITAA 1936 includes in the reference in subsection 47(1) to income derived by a company a reference to an amount included in the company's assessable income or a net capital gain that would be included in the company's assessable income if the required net capital gain is worked out in accordance with the method statement contained in paragraph 47(1A)(b) of the ITAA 1936. The effect of subsection 47(1A) of the ITAA 1936 is that it only includes in income the net capital gains that are included in assessable income (without indexation) under Part 3-3 of the ITAA 1997. Capital gains that are disregarded or otherwise not within the concept of a net capital gain included in the assessable income of the company are also not within the meaning of the word 'income'. | Detailed Reasoning - Application to your circumstances: The capital distributions made to you by the trustee of the Trust are prima facie distributions of trust corpus so would not be assessable under section 99B of ITAA 1936 unless they are attributable to amounts that would be assessable to the trustee had they been a resident taxpayer. The liquidator's distributions would not be assessable to the trustee resident taxpayer pursuant to section 47 of the ITAA 1936 because a capital gain from the sale of the overseas businesses and assets by the overseas companies would not have come within the extended definition of income derived by a company in subsection 47(1A) of the ITAA 1936. It is clear from the decisions in Allen (Trustee), in the matter of Allen's Asphalt Staff Superannuation Fund v Commissioner of Taxation [2011] FCAFC 118 and SCCASP Holdings Pty Ltd as trustee for the H&R Super Fund v Commissioner of Taxation [2013] FCAFC 45 that an amount of statutory income may be derived. Section 99B(2)(a) of ITAA 1936 is not limited to the derivation of items of ordinary income. It must then be considered if the Trust had derived an amount which would have been assessable if derived by a resident. CGT event G1 happens if a company makes a payment in respect of a share in a company and the payment is not a dividend or an amount that is taken to be a dividend under section 47 of the ITAA 1936. However, a payment that is made within 18 months of the cessation of the company is disregarded for the purposes of this event. Rather those payments are treated as capital proceeds for CGT event C2 happening to the shares (subsection 104-135(6) of the ITAA 1997). In this case, the liquidation of the company was finalised on or around 20XX and the distribution was received by the Trust within 18 months of that date. Accordingly, those amounts would be treated as capital proceeds for the ending of the ownership of the shares. A capital gain from CGT C2 happening to the share would be included in the net capital gain of a resident taxpayer. This in turn would be included in the assessable income of such a taxpayer. It appears from the records of the Trust provided to us that the shares in those companies had a nominal cost base. Accordingly, subject to quantification of the other elements of the cost base of the shares, we would expect that a capital gain of effectively the entirety of the receipt from the liquidator by the trustee would be deemed to be excluded from being trust corpus by the exclusion in paragraph 99B(2)(a) of the ITAA 1936. As noted at paragraphs 13-20 of TD 2017/24, paragraphs 99B(2)(a) and 99B(2)(b) of ITAA 1936, posit a 'hypothetical taxpayer' who is a resident, but do not otherwise specify characteristics of that taxpayer. In the Commissioner's view, it cannot be assumed that this hypothetical taxpayer has other characteristics; for example, that it is an entity eligible for the CGT discount. It follows that an amount which is included in assessable income under section 99B of ITAA 1936 cannot be reduced by the CGT discount. | Detailed Reasoning - Conclusion: To the extent that the distribution to the Company is attributable to a gain from the hypothetical CGT event C2 happening to the trustee of the Trust, it will be assessable to the Company under section 99B of ITAA 1936.