Chartered Accountants ANZ has lodged a submission on the draft tax determinations:
- TD 2019/D6 Income tax: does Subdivision 855-A (or subsection 768-915(1)) of the Income Tax Assessment Act 1997 disregard a capital gain that a foreign resident (or temporary resident) beneficiary of a resident non-fixed trust makes because of subsection 115-215(3)? (TD 2019/D6), and
- TD 2019/D7 Income tax: is the source concept in Division 6 of Part III of the Income Tax Assessment Act 1936 relevant in determining whether a non-resident beneficiary of a resident trust (or trustee for them) is assessed on an amount of trust capital gain arising under Subdivision 115-C of the Income Tax Assessment Act 1997? (TD 2019/D7).
The Commissioner’s preliminary view in TD 2019/D6 is that section 855-40 of the Income Tax Assessment Act 1997 (ITAA 1997) only disregards a capital gain that a foreign resident beneficiary makes in respect of a CGT asset that is not taxable Australia property because of subsection 115-215(3) if the trust is a fixed trust.
The ATO has reached this conclusion based on policy justifications for limiting relief to capital gains where beneficiaries have interests in fixed trusts and the ATO’s reliance on the enactment of section 855-40 expressly dealing with fixed trusts. CA ANZ does not support this conclusion in view of overarching trust tax policy and international practice and has urged the ATO to reconsider its views in the TD 2019/D6.
This draft determination concludes that the source concept in Division 6 of Part III of the Income Tax Assessment 1936 (ITAA 1936) is not relevant in determining whether an amount of trust capital gain is assessable to the non-resident beneficiary or trustee.
CA ANZ is not convinced that the source concept is not at all relevant in this regard. We note TD 2019/D7 lacks any discussion around the application of paragraph 115-220(1)(b) which is part of the test to determine when section 115-220 will actually apply. Assuming a beneficiary was presently entitled to a share of income of the trust, section 115-220 would apply if you (i.e. trustee) would be liable to be assessed (and pay tax) under section 98 of the ITAA 1936. The reference to section 98 of the ITAA 1936 brings in the source concept (i.e. in a subsection 98(3) or 98(4) situation – where the beneficiary is a non-resident at the end of the year of income – the trustee is only assessed and liable to pay tax on that proportionate share of the trust’s net income that is attributable to sources in Australia).
Overall, the views of the ATO in the draft determinations are not aligned with the overarching policy of the trust tax provisions which seek to place the beneficiary in the same position as a direct investor and are inconsistent with basic international principles.