Private ruling: Foreign trust distribution
Date of advice: 1 May 2020
Published: June 2020
Ruling period: Year ending 30 June 2020
Date scheme commenced: 1 July 2019

Ruling: Q1: Will the distribution by the foreign trust that had its origins in a capital gain from the disposal of foreign shares be assessable to you under the capital gains tax provisions? | A1: No. | Q2: Will the distribution by the foreign trust that had its origins in a capital gain from the disposal of foreign shares be assessable to you under subsection 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A2: Yes. | Q3: Although no amount is assessable to the foreign trust in Australia, will the amount assessable to you under subsection 99B(1) of the ITAA 1936 be equivalent to the amount of the capital gain the foreign trust made as calculated under the Australian capital gains tax provisions? | A3: Yes. | Q4: Does the double tax agreement between Australia and Country X prevent the foreign trust distribution from being taxed in Australia? | A4: No. | Q5: Will you be entitled to a foreign income tax offset for the foreign tax paid on the proportion of the foreign trust distribution that is assessable to you under subsection 99B(1) of the ITAA 1936? | A5: Yes.

Relevant facts and circumstances: You are a beneficiary of a trust resident in Country X. The trustees of the trust are all resident in Country X. The trust purchased all the shares in a company resident in Country X. The company purchased a property in Country X. You moved to Australia from Country X and subsequently became a citizen of Australia. Some years later, the trust sold the shares in the company to another entity. The trust made a capital gain for Country X tax purposes. A share of the sale proceeds is being distributed to you from the trust and tax will be payable in Country X on the distribution to you.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 99B | Income Tax Assessment Act 1936 Subsection 99B(1) | Income Tax Assessment Act 1936 Subsection 99B(2) | Income Tax Assessment Act 1936 Paragraph 99B(2)(a) | Income Tax Assessment Act 1936 Paragraph 99B(2)(b) | Income Tax Assessment Act 1997 Subdivision 115-C | Income Tax Assessment Act 1997 Section 770 | Income Tax Assessment Act 1997 Subdivision 855-A

Reasons for decision: Detailed Reasoning - Questions 1 to 3: Subdivision 855-A of the ITAA 1997 provides that taxable Australian property broadly includes direct and indirect interests in Australian real property and capital gains tax (CGT) assets used by foreign residents in carrying on business in Australia. Therefore, non-taxable Australian property includes CGT assets such as foreign real property and shares in foreign companies. Taxation Determination TD 2017/24 (TD 2017/24) explains that the trustee of a foreign trust for CGT purposes does not include in the net income of the trust a capital gain from a CGT event happening to a CGT asset which is non-taxable Australian property. Further, the amount is not treated as a capital gain of the trust's beneficiaries and no additional amounts are included in the assessable income of the trustee under Subdivision 115-C of the Income Tax Assessment Act 1997 (ITAA 1997). An amount attributable to the capital gain may nonetheless be assessable to the beneficiary under section 99B of the ITAA 1936 which deals with the receipt of trust income that has not previously been subject to tax in Australia. Subject to subsection 99B(2) of the ITAA 1936, subsection 99B(1) requires a beneficiary to include in their assessable income an amount of trust property that is paid to, or applied for their benefit, provided the beneficiary was resident at any time during the income year in which the payment or application was made. The amount made assessable by subsection 99B(1) of the ITAA 1936 does not have the character of a capital gain for Australian tax purposes, nor is there any linkage between subsection 99B(1) and Subdivision 115-C of the ITAA 1997. Subsection 99B(2) of the ITAA 1936 excludes certain amounts from the scope of subsection 99B(1). Most relevantly to you: · paragraph 99B(2)(a) excludes an amount representing corpus of the trust estate, except to the extent to which it is attributable to amounts derived by the trust estate that, if they had been derived by 'a taxpayer being a resident', would have been included in the assessable income of that taxpayer for a year of income, and · paragraph 99B(2)(b) excludes an amount that, if it had been derived by a taxpayer being a resident, would not have been included in the assessable income of that taxpayer of a year of income. The phrase 'a taxpayer being a resident' refers to a hypothetical taxpayer as explained in TD 2017/24: 13. Paragraphs 99B(2)(a) and 99B(2)(b) 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. 14. Paragraph 99B(2)(a) refers to an amount derived by 'the trust estate', but then hypothesises a scenario in which that amount was derived by 'a taxpayer being a resident'. It is evident from this language that the hypothetical taxpayer is not the trustee of the trust, but an entirely separate, fictional entity. There is support for this approach in Howard v. Federal Commissioner of Taxation where the Full Federal Court observed that the 'hypothesis posited is that the amount received by the [Esparto] trust estate was derived by a resident taxpayer', which was relevantly different from the actual characteristics of that trust and its trustee. 15. Moreover, paragraph 99B(2)(b) identifies the hypothetical taxpayer without reference to any trustee. 16. Both paragraphs 99B(2)(a) and 99B(2)(b) employ the indefinite article 'a' to identify a non-specific taxpayer deriving the amount in a non-specific year of income. This indicates that the hypothesis in these provisions is concerned with resident taxpayers generally, rather than a particular trustee or beneficiary. Nor do those paragraphs refer to any particular category of taxpayer. In your case, you are to receive a distribution from a foreign trust that had its origins in a capital gain from the disposal of foreign shares that were non-taxable Australian property. As capital gains from the disposal of CGT assets such as shares are included in the assessable income of Australian resident taxpayers, paragraph 99B(2)(a) of the ITAA 1936 operates so that the amount of the distribution that is referrable to the foreign capital gain is not included as part of the corpus of the trust, and is therefore assessable to you under subsection 99B(1) of the ITAA 1936. As stated above, an amount made assessable by subsection 99B(1) of the ITAA 1936 does not have the character of a capital gain for Australian tax purposes (in the hands of the beneficiary) so the assessable amount of the distribution cannot be reduced by a capital loss offset or the 50% CGT discount, for example. Although no amount is assessable to the foreign trust in Australia, the amount assessable to you under subsection 99B(1) of the ITAA 1936 will be equivalent to the amount of the capital gain the foreign trust made as calculated under the Australian capital gains tax provisions Question 4 In determining any liability to Australian tax it is necessary to consider not only the income tax laws but also any applicable tax treaty (double tax agreement) contained in the International Tax Agreements Act 1953 (Agreements Act) that exists between Australia and Country X. Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and the ITAA 1997 where there are inconsistent provisions (except in some limited situations). The double tax agreement (DTA) with Country X does not specifically deal with trust distributions so Article 21 concerning 'other income' is applicable. Article 21 of the DTA provides that items of income of a resident of one of the countries arising from sources in the other country, not dealt with in the other articles of the agreement, may be taxed in both countries. Therefore, the DTA between Australia and Country X does not prevent the foreign trust distribution from being taxed in Australia. | Detailed Reasoning - Question 5: Section 770-10 of the ITAA 1997 provides that a foreign income tax offset can be claimed for foreign income tax paid by a taxpayer in respect of an amount that is included in their assessable income. Foreign income tax is a tax imposed by a law other than an Australian law, on income, profits or gains (section 770-15 of the ITAA 1997). The taxpayer must have paid the foreign income tax before an offset is available. A taxpayer is deemed to have paid the foreign income tax if the foreign tax has been withheld from the income at its source (section 770-130 of the ITAA 1997). As foreign tax will be paid on the amount distributed to you, a foreign income tax offset will be allowed on the foreign tax paid on the proportion of the distribution included in your assessable income.