ATO Interpretative Decision

ATO ID 2010/55

Income Tax

• Note: This ATO ID contains a view in respect of section 98 of the Income Tax Assessment Act 1936 as it operated prior to amendments introduced by the Tax Law Amendment (2011 Measures No. 5) Act 2011 (including the introduction of Division 6E of Part III of the Income Tax Assessment Act 1936). Except in the case of some early balancing trusts and managed investment trusts, those amendments take effect from the 2010-11 and later income years.
  This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade. The ATO ID is current in relation to the re-enacted or remade provisions.
  Australia's tax treaties and other agreements except for the Taipei Agreement are set out in the Australian Treaty Series. The citation for each is in a note to the applicable defined term in sections 3AAA or 3AAB of the International Tax Agreements Act 1953.

Issue

Is the trustee of a resident trust for CGT purposes assessable under paragraph 98(3)(a) of the Income Tax Assessment Act 1936 (ITAA 1936) in relation to an individual non-resident beneficiary's share of the net income of a trust estate that is attributable to capital gains arising from the sale, in Australia, of shares in an Australian company, if the beneficiary is presently entitled to a share of the income of the trust for that year?

Decision

Yes. The trustee is assessable under paragraph 98(3)(a) of the ITAA 1936 because:

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the beneficiary is presently entitled to a share of the income of the trust,

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the beneficiary is a non-resident individual; and

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the capital gains from the sale of the shares in Australia are attributable to sources in Australia.

Facts

The taxpayer is the trustee of a resident trust for CGT purposes. The trust is not a fixed trust as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997).

A beneficiary of the trust is an individual who was a non-resident throughout the income year. The beneficiary was presently entitled to a share of the income of the trust for the income year.

During the year the trustee made capital gains from the disposal of some shares in a company listed on the Australian Stock Exchange. The shares are not taxable Australian property for the purposes of section 855-15 of the ITAA 1997 because they do not pass the non-portfolio interest or the principal asset tests referred to in subsection 855-25(1) of the ITAA 1997.

The trustee made no other capital gains or losses and did not have any net capital losses from earlier years to be carried forward.

Reasons for Decision

A resident trust for CGT purposes must include in the calculation of its net capital gain, capital gains and capital losses from CGT events happening to its worldwide assets. The net capital gain is then included in the trust's net income calculated in accordance with subsection 95(1) of the ITAA 1936.

Broadly, the trustee of a trust may be assessed on a share of the trust's net income where there is an individual beneficiary who is a non-resident at the end of a year of income and that beneficiary is presently entitled to a share of the income of the trust. If the beneficiary has not been a resident of Australia at any time during the income year, the trustee is assessed under paragraph 98(3)(a) of the ITAA 1936 on so much of the share of the net income of the trust estate as is attributable to sources in Australia - paragraph 98(2A)(d) of the ITAA 1936.

The issue in this case is whether the capital gains from the disposal of the shares are from sources in Australia. There is no statutory source rule for capital gains or net capital gains, for the purposes of Division 6 of Part III of the ITAA 1936. The 'taxable Australian property' tests in section 855-15 of the ITAA 1997 are not relevant for this purpose.

In the absence of such a statutory source rule reliance is appropriately placed on common law source rules as they relate to income.

The leading authority on the source of profits from the sale of shares is Australian Machinery and Investments Company Ltd v. Deputy Federal Commissioner of Taxation (WA) (1946) 180 CLR 9; 3 AITR 359; (1946) 8 ATD 81, where it was held that where shares are situated outside Australia and sold outside Australia the profit on sale is derived wholly from a source outside Australia. Starke J held that the relevant source rule is where a business habitually enters into and carries out those contracts with a view to profit.

Because the shares held by the trust were in an Australian company and the disposal of the shares occurred in Australia, the capital gains made by the trustee are considered to have a source in Australia.

The trustee is therefore assessed under paragraph 98(3)(a) of the ITAA 1936 in relation to the beneficiary's share of the trust net capital gain as the beneficiary is presently entitled to a share of the income of the trust, the beneficiary was a non-resident throughout the income year, and the gain is attributable to sources in Australia.

It is not relevant for the purposes of Division 6 of Part III of the ITAA 1936 that, had the beneficiary acquired the shares directly, they would not have made a capital gain because their shares would not have been taxable Australian property for the purposes of section 855-15 of the ITAA 1997.

Year of income:  Year ended 30 June 2007

Legislative References:
Income Tax Assessment Act 1997
   section 855-15
   subsection 855-25(1)
   subsection 855-40(3)
   subsection 995-1(1)

Case References:
Australian Machinery & Investment Co Ltd v Deputy Commissioner of Taxation (WA)
   (1946) 180 CLR 9
   (1946) 3 AITR 359
   (1946) 8 ATD 81

Related ATO Interpretative Decisions
ATO ID 2010/54

Keywords
Capital gains tax
Non-resident individuals
Trusts
Shares
CGT asset
CGT taxable Australian assets

Siebel/TDMS Reference Number:  6337589

Business Line:  Public Groups and International

Date of publication:  5 March 2010

ISSN: 1445-2782