In brief - Federal Court confirms the ATO's preliminary view on the taxation of capital gains made by the trustee of an Australian non-fixed trust in Peter Greensill Family Co Pty Ltd v Commissioner of Taxation  FCA 559
The ATO's preliminary view, which is set out in TD 2019/D6, is that tax is payable in Australia where:
- a capital gain is made by the trustee of an Australian non-fixed trust (such as a discretionary trust)
- the capital gain is taken to be made by a foreign beneficiary (such as where the foreign beneficiary is specifically entitled to the capital gain)
even if the capital gain relates to an asset that is not taxable Australian property.
TD 2019/D6 is discussed in more detail in our article Tax payable by foreign residents on capital gains may increase under proposed changes.
In the Greensill case, the trustee of an Australian discretionary trust made capital gains of around $58 million when it sold shares in an Australian financial services company. The shares were not taxable Australian property. The trustee resolved to distribute the capital gains to a foreign beneficiary. The trustee also transferred some other shares in the same company to the foreign beneficiary in specie, which also gave rise to capital gains for the trustee.
The trustee argued that the capital gains were not subject to tax due to the application of section 855-101 of the Income Tax Assessment Act 1997. That section allows a taxpayer to disregard a capital gain from a CGT event if:
- the taxpayer is a foreign resident or the trustee of a foreign trust
- the CGT event happens in relation to a CGT asset that is not taxable Australian property
Federal Court findings in Greensill case
The Federal Court found that section 855-101 did not apply because:
- the trustee was the taxpayer and it was not a foreign resident
- it did not matter that the beneficiary was a foreign resident
- the trust was not a foreign trust
- the relevant taxing provisions for capital gains required amounts to be calculated which were included as assessable amounts of the trust estate and the beneficiary. Those amounts were not a capital gain from a CGT event, they were simply amounts that the provisions required to be calculated that did not have any particular character
- the legislation includes a specific provision to exclude capital gains made by beneficiaries of a fixed trust which indicated that section 855-10(1) did not apply where a capital gain is made by beneficiaries of a non-fixed trust
The Federal Court also found that the legislative history and extrinsic material supported the conclusion that section 855-101 did not apply.
The trustee's argument was based on an assumption that there was a policy objective to exclude from tax capital gains made by foreign beneficiaries of Australian trusts where the capital gains related to assets that were not Australian taxable property. The Federal Court found that the words of the legislation, the legislative history and extrinsic material did not support this assumption.
If the trustee does not appeal the decision, we expect that the ATO will finalise its preliminary view in TD 2019/D6 substantially in its current form.
The outcome is that the characterisation of the CGT asset as taxable Australian property (or not) will have no bearing on the taxation of capital gains made by the trustee of an Australian non-fixed trust, where the capital gains are taken to be made by a foreign beneficiary. This is subject to the provisions of any applicable double tax agreement, which is an issue that is not addressed in TD 2019/D6 or the Greensill case.
Colin Biggers & Paisley
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