The recent Federal Court decision in Greensill creates significant issues for non-resident beneficiaries of Australian discretionary trusts, by imposing capital gains tax on trustees distributing capital gains to non-residents, even if the gains relate to assets which are not taxable Australian property.
Going forward, the role of discretionary trusts as a holding vehicle for family groups with non-resident beneficiaries will now need to be considered carefully. This will ultimately impact the use of discretionary trusts for asset protection, flexibility and succession planning.
Peter Greensill Family Co Pty Ltd (PGFC), the trustee of the Australian discretionary family trust Peter Greensill Family Trust (PGFT), made a capital gain in the 2015, 2016 and 2017 tax years on the sale of shares which were not "taxable Australian property". In each income year, PGFC resolved to distribute 100% of the capital gains from the sale of those shares (just over $58m in total) to Mr Greensill, a foreign resident and beneficiary under the PGFT.
For the three income years in question, the ATO issued assessments to PGFC under section 98 of the ITAA 1936 on the basis that the capital gains distributed to Mr Greensill, being deemed or attributable gains of Mr Greensill under Subdiv 115-C of the ITAA 1997, were assessable to PGFC.
Greensill considered the interaction of the trust taxation rules in Division 6 and Subdivision 6E of the ITAA 1936, Subdivision 115-C of the ITAA 1997 (which deals with the capital gains made by trustees), and Division 855 of the ITAA 1997, which exempts non-residents from CGT unless the CGT event is happening to "taxable Australian property".
Had the capital gains that were distributed to Mr Greensill been made by him directly (ie he held the shares that were disposed of), he would have been exempt from taxation. Section 855-10 provides that a foreign resident is to "disregard a capital gain or capital loss from a CGT event if... the CGT event happens in relation to a CGT asset that is not taxable Australian property."
The court ruled that section 855-10 did not apply so as to disregard the capital gains because the statutory context suggested that "from", when used in section 855-10(1) in the phrase "from a CGT event", should be understood as requiring a direct connection between the capital gain and the CGT event. Accordingly, a capital gain which is attributed to a beneficiary, because of a CGT event happening to a CGT asset owned by a trust, was not intended to fall within the phrase "a capital gain ... from a CGT event". This is a very technical reading of the legislation and cuts across a long standing approach that the tax position of a beneficiary is to be determined as if they had made the capital gain themselves (ie Mr Greensill should be viewed as making the capital gain himself, and because he is a non-resident, the gain should be disregarded by section 855-10).
This decision applies principally to discretionary trusts as there is a statutory flow through provided for beneficiaries of fixed trusts, which would include unit trusts and collective investment vehicles.
The case may be appealed and the outcome of that process should be reviewed before any significant restructuring is contemplated. There is also the possibility of legislative change to address the discrepancy in treatment between fixed and discretionary trusts. However, until any appeal succeeds or the law is changed, it is important that non-resident beneficiaries of discretionary trusts consider their position and undertake sufficient planning to ensure they are not subject to Australian CGT from assets held in their family trust.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.