The ATO clarifies where foreign-resident beneficiaries and capital gains stand in new Taxation Determinations

On 31 August 2022, the Australian Taxation Office (ATO) released two taxation determinations:

• Taxation Determination 2022/12 (TD 2022/12) dealing with the relevance of source for capital gains (accessible here); and
• Taxation Determination 2022/13 (TD 2022/13) dealing with the application of the TAP rules to capital gains to which non-resident beneficiaries are entitled (accessible here).

The Taxation Determinations confirm the ATO’s position in relation to capital gains and foreign-resident beneficiaries following the decision of the Full Court of the Federal Court’s decision in Peter Greensill Family Co Pty Ltd (Trustee) v Commissioner of Taxation [2021] FCAFC 99 (Greensill). They finalise the ATO’s views set out in prior draft taxation determinations (e.g. Draft Taxation Determination 2019/D6 and Draft Taxation Determination 2019/D7).

Key takeaways from the ATO’s position in the Taxation Determinations

Treatment of gains to which non-resident beneficiaries are entitled

When non-resident beneficiaries are entitled to capital gains from a trust, then in determining the tax treatment of the beneficiary:

• the form of the trust is critical to determine whether the beneficiary is entitled to the benefit of the exception in section 855-40 to exclude tax on capital gains from non-TAP assets; and
• the source of the capital gain is not relevant.

A non-resident beneficiary entitled to gains from a “fixed trust” may rely on the exception in section 855-40 to exclude tax on capital gains from non-TAP assets. Attribution managed investment trusts (AMITs) and certain managed investment trusts (MITs) have a deemed fixed trust status.

A non-resident beneficiary entitled to gains from a trust which is not a “fixed trust”, such as a conventional discretionary trust, may not rely on the exceptions in Division 855-A to disregard capital gains arising from the operation of subsection 115-215(3). In addition, the source of the gain will not determine if the non-resident beneficiary is to be assessed on the gains.

This means there is a significantly different tax outcome for the non-resident beneficiary depending on whether the trust is a fixed trust.

Application is not limited to future arrangements

The views of the ATO expressed in the Taxation Determinations apply to arrangements entered into before and after their issue date.

The ATO’s positions under the Taxation Determinations are as follows:

Following the Full Court finding in favour of the ATO in Greensill, the ATO has relied on the Full Federal Court’s decision to support a position that may be considered inconsistent with the policy objectives behind the amendments in 2011 inserting Division 6E.

When do these Taxation Determinations take effect?

The Taxation Determinations apply to arrangements entered into before and after its issue. There is some ambiguity because the exceptions to the application of the Taxation Determinations have been expressed slightly differently as between TD 2022/12 and TD 2022/13. We have set this out in the table below. 

The ATO states that it will not devote compliance resources to identify arrangements which would give rise to adjustments on the basis of the views set out in TD 2022/12, for the 2018-19 and earlier income years. There is no equivalent assurance given in relation to the application of compliance resources to identify activities that would give rise to an adjustment in respect of TD 2022/13 for those same years. This inconsistency could potentially affect the level of assurance provided in TD 2022/12, which may be of significant concern for taxpayers. This is particularly the case as the ATO has indicated that if it becomes aware of an arrangement contrary to the views expressed in TD 2022/12 in the course of compliance activities, the Commissioner will apply the law consistently with that taxation determination.  

Key points: Source Rules and Capital Gains – TD 2022/12

• The “source” concept is not relevant to determining whether trust capital gains are assessable to a non-resident beneficiary under Subdivision 115-C of the 1997 Act.
• As distinct from the 2010-11 and former years, Subdivision 115-C of the 1997 Act treats beneficiaries (resident and non-resident) as having an extra capital gain in determining the beneficiary’s net capital gain (regardless of the source of that gain). Section 115-220 assesses the trustee on capital gains also without regard to source.
• Relevantly, the source concept remains relevant to the application of section 99D of the 1936 Act (i.e. refunds to non-resident beneficiaries for tax paid by a trustee under sections 99 or 99A).

Key points: Foreign Resident Capital Gains Tax Exemption – TD 2022/13

• Section 855-40 of the 1997 Act only disregards capital gains that a foreign-resident beneficiary has where the trust is a fixed trust. This does not extend to a foreign resident (because of section 855-10) or a temporary resident (because of subsection 768-915(1)).
• The policy rationale behind the section 855-40 exemption discourages foreign-resident beneficiaries from investing in resident Australian trusts through treating them as if they directly held the trust assets.
• The ATO considers that the exemption should not be extended to foreign and temporary residents as:
  • Section 855-10 only disregards gains or losses if the CGT event relates to a not taxable Australian property asset.
  • the gains included in a beneficiary’s taxable income under section 115-215 arises irrespective of there being a CGT event.
  • Section 855-40 already provides an exemption in relation to foreign beneficiaries of fixed trusts, indicating that section 855-10 does not intend to cater for capital gains attributed to foreign-resident beneficiaries.
  • Section 768-915 has a limited operation in relation to disregarding capital gains and losses.

If you would like more information on how these Taxation Determinations affect your own tax structures, please get in touch with the authors or your King & Wood Mallesons contact.