ATO Interpretative Decision

ATO ID 2002/913

Income Tax

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Issue

Is the trustee of a resident trust, for CGT purposes, assessable under paragraph 98(4)(d) of the Income Tax Assessment Act 1936 (ITAA 1936) in relation to that part of the net income of the trust estate attributable to capital gains arising from the sale, in Australia, of shares in Australian companies, to which individual non resident beneficiaries are presently entitled'?

Decision

Yes. The trustee is assessable under paragraph 98(4)(d) of the ITAA 1936 because:

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the beneficiaries are presently entitled to a share of the income of the trust,

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the beneficiaries are individual non-residents; 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 resident trust for CGT purposes. The Trust owns shares in companies listed on the Australian stock exchange. The trust owns less than 10% of the total value of the shares in each listed company. During the year the trustee disposed of some of these shares and made a capital gain. The trustee made no other capital gains or losses and did not have any net capital losses from earlier years to be carried forward.

The beneficiaries of the trust are individuals. At no time have they been residents of Australia. The beneficiaries were presently entitled to the income of the trust.

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 net income of the trust in accordance with subsection 95(1) of the ITAA 1936.

Broadly, subsection 98(4) of the ITAA 1936 provides that the trustee of a trust may be assessed 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 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 on so much of the share of the net income of the trust estate as is attributable to sources in Australia.

The requirements other than the source of the capital gains forming part of the net income of the trust are clearly satisfied.

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 'necessary connection with Australia' tests in section 136-25 of the Income Tax Assessment Act 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 Australian companies 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(4)(d) of the ITAA 1936 in relation to the trust net capital gain as the beneficiaries are presently entitled to a share of the income of the trust, the beneficiaries were non-residents 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 beneficiaries acquired the shares directly, they would not have made a capital gain because their shares would not have had the necessary connection with Australia.

Year of income:  Year ending 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   section 136-25

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

Related ATO Interpretative Decisions
ATO ID 2001/300
ATO ID 2002/903

Keywords
Capital gains tax
Trusts
Shares
CGT asset with the necessary connection with Australia

Business Line:  Office of the Chief Tax Counsel

Date of publication:  26 September 2002

ISSN: 1445-2782