House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)

Chapter 1 - Capital gains tax and foreign residents

Outline of chapter

1.1 Schedule 1 to this bill makes a number of changes to the Australian tax treatment of foreign residents that make a capital gain or capital loss in respect of an interest in a fixed trust.

Context of amendments

1.2 Presently, there are parts of the income tax law that make it less attractive for foreign residents to invest in an Australian resident trust holding assets than it is for them to invest directly in those assets. This makes the Australian funds management industry, which commonly uses trusts to pool funds and manage investments, less competitive and efficient than it would otherwise be. It also discourages foreign investment in Australia more generally.

1.3 The amendments to Schedule 1 to this bill seek to overcome these problems by more closely aligning the tax treatment of foreign residents that invest in fixed trusts on the one hand, with the tax treatment of foreign residents that invest directly in assets (in Australia or abroad) on the other. This will mean that the tax law no longer impedes foreign residents from investing in assets through Australian resident trusts, including managed funds.

1.4 These reforms are consistent with the Board of Taxation's Recommendations on International Taxation of 28 February 2003. Schedule 1 to this bill implements Recommendations 4.6(1), 4.7 and 4.8.

Summary of new law

1.5 Schedule 1 makes three key changes to the income tax law.

1.6 One change is to disregard a capital gain or capital loss made by a foreign resident from a capital gains tax (CGT) event happening to a fixed trust if enough of the underlying assets of the trust are without the necessary connection with Australia. In particular this will apply where a foreign resident disposes of an interest in an Australian fixed trust. This is appropriate because CGT would not apply to a foreign resident that held such assets directly.

1.7 Another change is to disregard a capital gain made by a foreign resident in respect of the taxpayer's interest in a fixed trust if the gain relates to an asset without the necessary connection with Australia. For example, this will apply where the capital gain arises from the disposal by an Australian fixed trust of a portfolio interest in an Australian public company. Again, this is appropriate because a foreign resident would not be assessed on such a gain if the asset were held directly.

1.8 The final change is to provide an exception to CGT event E4 for distributions of foreign source income from the trustee of a trust to a beneficiary that is a foreign resident. CGT event E4 effectively creates a capital gain if a trustee makes a payment to a beneficiary (such as foreign source income) that is not assessable income of the beneficiary. This change is appropriate because foreign residents investing directly in the asset generating foreign source income are, in general, not subject to Australian CGT.

Application to the funds management industry

1.9 These amendments apply to foreign residents that have interests in managed funds (or other fixed trusts) whose assets are without the necessary connection with Australia.

1.10 However, managed funds that invest in assets without the necessary connection with Australia may also have some assets with the necessary connection. This may help a fund to diversify its portfolio or achieve some other commercial objective. To ensure as broad an application as possible, the amendments in Schedule 1 to this bill apply to interests in fixed trusts where 10% or less of the trust's assets (by market value) have the necessary connection with Australia.

1.11 The managed funds industry typically operates through layers or chains of trusts. For example, a managed fund will often invest in a wholesale trust, which then invests in real assets. The amendments in this bill are designed to allow taxpayers to 'look-through' fixed trusts to the underlying assets.

1.12 These amendments are not confined to foreign residents with interests in widely held unit trusts. The amendments will apply to interests in closely held trusts and trusts that are not unit trusts. This is to ensure the benefits of the measures apply as widely as possible, irrespective of the trust arrangements through which the foreign resident invests. However, the trust in which the foreign resident has invested and all relevant trusts in the chain must meet the definition of 'fixed trust' in the Income Tax Assessment Act 1997 (ITAA 1997). This is to ensure that there is no discretion available to the trustee to provide benefits to parties who are not beneficiaries of the trust. This is important to the integrity of the amendments.

Comparison of key features of new law and current law

Detailed explanation of new law

What do these amendments do?

1.13 The object of the amendments is to provide comparable tax treatment between direct ownership and indirect ownership (through a fixed trust) by foreign residents of CGT assets without the necessary connection with Australia. [Schedule 1, item 6, section 768-600]

1.14 The amendments provide:

•

a capital gain or capital loss that a foreign resident makes from a CGT event happening to an interest in a fixed trust is disregarded where the assets underlying the interest in the trust do not have the necessary connection with Australia [Schedule 1, item 6, subsection 768-605(1)] ;

•

a capital gain that a foreign resident makes in respect of an interest in a fixed trust is disregarded where the gain relates to an asset without the necessary connection [Schedule 1, item 6, subsection 768-605(2)] ; and

•

an exception to CGT event E4 for a distribution of foreign source income by the trustee of a trust to a foreign resident beneficiary [Schedule 1, item 4, subsection 104-70(9)].

1.15 This will remove an impediment to foreign residents investing in assets through Australian fixed trusts, thereby making the Australian managed funds sector more internationally competitive. This should encourage foreign investors to use Australian funds managers to make investments in Australia and the region.

Disregard a capital gain or capital loss made by a foreign resident from a capital gains tax event happening to an interest in a fixed trust

1.16 A foreign resident makes a capital gain or capital loss from a CGT event happening to an interest in a fixed trust (e.g. disposal of the interest) if the interest is an asset with the necessary connection with Australia. This is the case even if all of the assets underlying the interest are, for example, foreign assets which do not have the necessary connection with Australia.

1.17 There are nine categories of assets with the necessary connection with Australia listed in the table in section 136-25 of the ITAA 1997. Some of the assets listed in the table include land in Australia, shares in an Australian resident private company, holdings of at least 10% of the units in a resident unit trust, an interest (of any size) in any other resident trust, and holdings of at least 10% of the shares in a resident public company.

1.18 Schedule 1 to this bill changes the law so that a capital gain or capital loss made by a foreign resident on an interest in a fixed trust (the 'first trust') will be disregarded if at least 90% (by market value) of the trust's assets are without the necessary connection with Australia. A capital gain or capital loss will also be disregarded if at least 90% of assets held by other fixed trusts in which the first trust has an interest (directly, or indirectly through a chain of fixed trusts) are without the necessary connection with Australia. [Schedule 1, item 6, subsection 768-605(1) and section 768-610]

1.19 This will provide a similar tax outcome to a situation where a foreign resident directly holds assets that do not have the necessary connection with Australia, rather than through a fixed trust. This is consistent with the object of the amendments.

1.20 A number of requirements must be satisfied for a capital gain or capital loss to be disregarded:

•

the taxpayer's asset is an interest in a 'fixed trust'. A fixed trust is a trust in which the beneficiaries have fixed entitlements to all of its income and capital [Schedule 1, item 6, subsection 768-605(1)] ;

•

at the time of the CGT event, the taxpayer is a foreign resident [Schedule 1, item 6, paragraph 768-605(1)(a)] ;

•

the interest in the fixed trust is an asset with the necessary connection with Australia [Schedule 1, item 6, paragraph 768-605(1)(b)] :

-

a unit in a unit trust has the necessary connection if the unit trust is a resident trust and the taxpayer owned at least 10% of the issued units at any time during the five years before the CGT event happens (item 6 in the table in section 136-25 of the ITAA 1997); and

-

an interest in any other trust has the necessary connection if the trust is a resident trust (item 4 in the table in section 136-25);

•

the conditions in section 768-610 are satisfied [Schedule 1, item 6, paragraph 768-605(1)(c)].

1.21 The conditions in section 768-610 are satisfied if at least 90% (by market value) of the first trust's assets are without the necessary connection to Australia when the CGT event happened to the taxpayer's interest in the trust. [Schedule 1, item 6, paragraph 768-610(2)(a)]

1.22 Those conditions are also satisfied:

•

if at least 90% (by market value) of the assets of a fixed trust in which the first trust has an interest (directly, or indirectly through a chain of trusts) do not have the necessary connection to Australia when the CGT event happened to the taxpayer's interest in the first trust [Schedule 1, item 6, paragraph 768-610(2)(b)] ; and

•

at least 90% (by market value) of the assets of the first trust, and each other trust in the chain of trusts, would not have the necessary connection with Australia, if you assumed that any interest the trust holds in another fixed trust in the chain did not have the necessary connection with Australia [Schedule 1, item 6, subsections 768-610(3) and (4)].

1.23 The purpose of the conditions is to treat an interest in a trust as an interest without the necessary connection with Australia if the underlying assets of the trust do not have the necessary connection with Australia.

Diagram 1.1: Capital gain or loss from disposing of an interest in an Australian fixed trust

Example 1.1: Selling an interest in an Australian fixed trust which has interests in other Australian fixed trusts

Leo, a foreign resident, has an interest in Trust A, which has interests in Trusts B and C. Trust B has an interest in Trust D and Trust C has an interest in Trust E. Trust D has Asset 1 and Trust E has Asset 2. Assets 1 and 2 are assets without the necessary connection with Australia.

The trusts referred to in this example are resident fixed trusts and the interests in these trusts have the necessary connection with Australia.

Leo sells his interest in Trust A and makes a capital loss. The capital loss will be disregarded if the conditions in section 768-610 are satisfied. The condition in subsection 768-610(2) is not satisfied for Trust A (because the assets of the first trust (Trust A) have the necessary connection with Australia), but is satisfied for Trusts D and E. This is because more than 90% of the assets of Trust D and more than 90% of the assets of Trust E are without the necessary connection with Australia. This means that the further condition in subsection 768-610(4) must be satisfied for Trust A and for each trust in the chain between Trusts A and D (i.e. Trust B) and the chain between Trusts A and E (i.e. Trust C).

The further condition is satisfied for Trust B because its only asset is an interest in Trust D and this is taken to be without the necessary connection. Similarly, the further condition is satisfied for Trust C because its only asset is an interest in Trust E and this is taken to be without the necessary connection. The further condition is also satisfied for Trust A because its only assets are interests in Trust B (in relation to one chain of trusts) and in Trust C (in relation to the other chain of trusts). Both of these assets are taken to be without the necessary connection.

The overall result is that the conditions in section 768-610 are satisfied and the capital loss is disregarded.

Example 1.2: Selling an interest in an Australian fixed trust which has assets with and without the necessary connection with Australia

Leo, a foreign resident, has an interest in Trust A. The interest is an asset with the necessary connection with Australia. Trust A is a resident fixed trust and has four assets. Asset 1 does not have the necessary connection and accounts for 50% of Trust A's assets (by market value). Asset 2 is without the necessary connection and accounts for 30% of Trust A's assets. Asset 3 does not have the necessary connection and accounts for 11% of Trust A's assets. Asset 4 has the necessary connection and accounts for 9% of Trust A's assets.

Leo sells his interest in Trust A and makes a capital gain. The capital gain will be disregarded if the conditions in section 768-610 are satisfied. The condition in subsection 768-610(2) is satisfied for Trust A as at least 90% of its assets are assets without the necessary connection with Australia. This means that the capital gain is disregarded. There is no need to consider the condition in subsection 768-610(4).

Example 1.3: Selling an interest in an Australian fixed trust with an interest in another Australian fixed trust and assets that do not have the necessary connection with Australia

Leo, a foreign resident, has an interest in Trust A. The interest is an asset with the necessary connection with Australia. Trust A has an interest in Trust B which is an asset with the necessary connection and accounts for 25% of Trust A's assets. Trusts A and B are resident fixed trusts.

Trust A has three other assets. Asset 1 does not have the necessary connection and accounts for 25% of Trust A's assets (by market value). Asset 2 does not have the necessary connection and accounts for 25% of Trust A's assets. Asset 3 is without the necessary connection and accounts for 25% of Trust A's assets.

Trust B has three assets. Assets 4, 5 and 6 are assets without the necessary connection with Australia and each accounts for 331/3% of Trust B's assets.

Leo sells his interest in Trust A and makes a capital gain. The capital gain will be disregarded if the conditions in section 768-610 are satisfied. The condition in subsection 768-610(2) is not satisfied for Trust A, but is satisfied for Trust B because at least 90% of its assets are without the necessary connection with Australia. This means that the further condition in subsection 768-610(4) must be satisfied for Trust A. This further condition is satisfied because the interest in Trust B is taken to be an asset without the necessary connection with Australia, which means that at least 90% of Trust A's assets are assets without the necessary connection.

The overall result is that the conditions in section 768-610 are satisfied and the capital gain is disregarded.

Example 1.4: How does Example 1.3 work when one of the assets of Trust B has the necessary connection with Australia?

The facts in this example are the same as Example 1.3, except that in this example Asset 4 has the necessary connection with Australia.

Leo sells his interest in Trust A and makes a capital gain. The condition in subsection 768-610(2) is not satisfied for Trust A. The condition is also not satisfied for Trust B because less than 90% of its assets do not have the necessary connection with Australia. This means that the conditions in section 768-610 are not satisfied and the capital gain is not disregarded. There is no need to consider the condition in subsection 768-610(4).

Disregard a capital gain made by a foreign resident beneficiary in a fixed trust in respect of an asset without the necessary connection with Australia

Background to the new law

1.24 A foreign resident is only subject to CGT on assets having the necessary connection with Australia. The concept of an asset having the necessary connection with Australia is discussed in paragraph 1.17.

1.25 On the other hand, an Australian resident is subject to CGT on all of its assets. A capital gain made by an Australian resident trust on any of its assets is included in its net capital gain, which is then included in its net income. For a beneficiary that is a foreign resident and is presently entitled to a share of that net income, the beneficiary (and usually the trustee) is assessed on the share to the extent that it is Australian sourced. The beneficiary's share of the net income could include capital gains made by the trust on assets without the necessary connection with Australia.

1.26 This difference between the tax treatment of capital gains made directly, and those made indirectly through a trust, discourages foreign residents from investing in Australian resident trusts that hold assets without the necessary connection with Australia, including foreign assets outside Australia.

1.27 Schedule 1 to this bill changes the law so that foreign residents enjoy comparable tax treatment of capital gains made directly by them and capital gains made by fixed trusts in which the foreign residents have an interest. This is achieved by disregarding a capital gain made by a foreign resident arising from an interest in a fixed trust (the 'first trust') if the gain is attributable to:

•

an asset without the necessary connection with Australia; or

•

an interest in another fixed trust (that does have the necessary connection with Australia) where the conditions in section 768-610 are satisfied.

[Schedule 1, item 6, subsection 768-605(2)]

1.28 This amendment also changes the law so that the trustee of a fixed trust is not liable to pay tax on an amount that is disregarded. [Schedule 1, item 6, subsection 768-605(3)]

Diagram 1.2: Capital gain where the underlying asset does not have the necessary connection with Australia

The interaction of the proposed law with the capital gains tax rules affecting trusts with net capital gains

1.29 The amendment relies, in part, on the rules in section 115-215 of the ITAA 1997 to achieve its objectives. Section 115-215 applies to a trust that has a net capital gain for an income year. In respect of a foreign resident beneficiary, section 115-215 effectively applies if the beneficiary is presently entitled to a share of the net income of a trust and that share is attributable to Australian sources.

1.30 Under subsection 115-215(3), a beneficiary of a trust has an 'extra capital gain' if the beneficiary's assessable income includes an amount under paragraph 97(1)(a), subsection 98A(1), if the beneficiary is not a company, or subsection 100(1). The amount of the extra capital gain depends on whether the capital gain made by the trust was a discount capital gain or was reduced by the small business 50% reduction.

1.31 It is the extra capital gains that subsection 768-605(2) is concerned with. The extra capital gain will be disregarded if a number of requirements are satisfied [Schedule 1, item 6, subsection 768-605(2)] :

•

the beneficiary makes a capital gain in respect of its interest in a fixed trust. This is a capital gain arising because the trustee has a net capital gain [Schedule 1, item 6, subsection 768-605(2)] ;

•

the beneficiary is a foreign resident when it makes the gain [Schedule 1, item 6, paragraph 768-605(2)(a)]. This means that the beneficiary must be a foreign resident when its assessable income for an income year includes an amount under a provision specified in subsection 115-215(2);

•

the capital gain relates to an asset [Schedule 1, item 6, paragraph 768-605(2)(b)]:

-

of a fixed trust in which the beneficiary has an interest (the 'first trust'); or

-

of another fixed trust in which the first trust has an interest (directly, or indirectly through a chain of fixed trusts);

•

the asset [Schedule 1, item 6, paragraph 768-605(2)(c)] :

-

does not have the necessary connection with Australia at the time of the CGT event; or

-

is an interest in a fixed trust and the conditions in section 768-610 are satisfied.

1.32 The conditions in section 768-610 are discussed in paragraphs 1.21 to 1.23. The conditions apply in the same fashion whether the CGT event happens to an interest in a fixed trust that is held by a foreign resident or by a fixed trust.

1.33 The beneficiary is allowed a deduction under subsection 115-215(6) of the ITAA 1997. The deduction is equal to the amount that was included in the beneficiary's assessable income under a provision specified in subsection 115-215(2) that is attributable to the net capital gain.

Example 1.5: Interaction with section 115-215 of the Income Tax Assessment Act 1997 when the foreign resident beneficiary is an individual

Leo, a foreign resident at year end, is the sole beneficiary of a resident fixed trust. The trust makes a capital gain of $2,000 from selling an asset without the necessary connection with Australia. The gain is a discount capital gain. In calculating the net income of the trust the trustee applies the CGT discount, resulting in a net income for the trust of $1,000.

The net income has an Australian source and Leo is presently entitled to it.

Step 1 - Leo adds $1,000 to his assessable income under subsection 98A(1) (because the trustee was assessed under subsection 98(4)).

Step 2 - Leo has an extra capital gain of $2,000 under paragraph 115-215(3)(b).

Step 3 - Leo disregards the extra capital gain in step 2 under subsection 768-605(2) because it is attributable to an asset without the necessary connection with Australia.

Step 4 - Leo deducts $1,000 from his assessable income under subsection 115-215(6).

The result is that the effect on Leo's taxable income is nil.

Application to a beneficiary that is a company and a foreign resident at year end

1.34 Section 115-215 does not apply to a beneficiary that is a company and a foreign resident at the end of an income year. These companies do not have any extra capital gains under section 115-215 that would otherwise be disregarded under the new law. (All they have is a share of the net income of the trust, which may include a net capital gain.)

1.35 To ensure that a company that is a foreign resident at year end can benefit from the new law, a deduction is allowed for the amount that would be disregarded for a company under subsection 768-605(2) had section 115-215 applied to it. [Schedule 1, item 6, section 768-615]

Example 1.6: Interaction with section 115-215 of the Income Tax Assessment Act 1997 when the foreign resident beneficiary is a company

The facts in this example are the same as Example 1.5, except that the beneficiary is a company, Leo Ltd, and the capital gain is not a discount capital gain.

Step 1 - Leo Ltd adds $2,000 to its assessable income under subsection 98A(1) (because the trustee was assessed under subsection 98(3)).

Step 2 - Leo Ltd deducts $2,000 from its assessable income under section 768-615. This is the amount that would be disregarded for Leo Ltd under subsection 768-605(2) had section 115-215 applied to it.

The result is that the effect on Leo Ltd's taxable income is nil.

Application to a trustee of a fixed trust

1.36 Currently the trustee of a trust is usually liable to pay tax under section 98 of the ITAA 1936 if a foreign resident beneficiary is presently entitled to a share of the net income of the trust and the share is attributable to Australian sources.

1.37 Under the proposed law, a trustee will not be liable to pay tax in respect of an amount that gives rise to a capital gain that is disregarded for a beneficiary under subsection 768-605(2) [Schedule 1, item 6, paragraph 768-605(3)(a) and subsection 768-605(4)]. In other words, a trustee will not be liable to pay tax on an amount that results in a beneficiary being assessed under a provision specified in subsection 115-215(2) and having an extra capital gain under subsection 115-215(3) which is then disregarded under the new law.

1.38 A beneficiary that is a company and is a foreign resident at year end does not make extra capital gains under section 115-215 (and does not disregard capital gains under the new law). In respect of these beneficiaries, a trustee is not liable to pay tax in respect of an amount that gives rise to a deduction for the company under section 768-615. [Schedule 1, item 6, paragraph 768-605(3)(b) and subsection 768-605(4)]

Example 1.7: Capital gain made in respect of an interest in an Australian fixed trust that sells assets with and without the necessary connection with Australia

For this example, refer to the diagram in Example 1.2.

Leo, a foreign resident, has an interest in Trust A which is an asset with the necessary connection with Australia. Trust A is a resident fixed trust. Trust A has four assets. Assets 1 and 3 are without the necessary connection with Australia. Assets 2 and 4 have the necessary connection.

Scenario 1

Trust A sells Asset 1 and makes a capital gain. The capital gain is included in the trust's net income to which Leo is presently entitled. Leo adds an amount to his assessable income under subsection 98A(1) (because the trustee was assessed under subsection 98(4)) and he has an extra capital gain under subsection 115-215(3). The extra capital gain will be disregarded under subsection 768-605(2) because it is attributable to an asset without the necessary connection with Australia.

Scenario 2

Trust A sells Asset 1 and makes a capital gain of $100. It also sells Asset 2 and makes a capital gain of $200. The net capital gain of $300 is included in the trust's net income to which Leo is presently entitled. Leo adds $300 to his assessable income under subsection 98A(1) and he has an extra capital gain of $300 under subsection 115-215(3). The extra capital gain of $100 will be disregarded under subsection 768-605(2) because it is attributable to an asset that does not have the necessary connection with Australia.

Scenario 3

Trust A sells Asset 1 and makes a capital gain of $100. It also sells Asset 2 and makes a capital loss of $40. The net capital gain of $60 is included in the trust's net income to which Leo is presently entitled. Leo adds $60 to his assessable income under subsection 98A(1) and he has an extra capital gain of $60 under subsection 115-215(3). The extra capital gain will be disregarded under subsection 768-605(2) because it is attributable to an asset without the necessary connection with Australia.

Example 1.8: Interest in an Australian fixed trust which has an interest in another fixed trust

For this example, refer to the diagram in Example 1.3.

Leo, a foreign resident, has an interest in Trust A. Trust A has an interest in Trust B. Trust B has three assets. Asset 4 is without the necessary connection and accounts for 50% (by market value) of Trust B's assets. Asset 5 is without the necessary connection and accounts for 41% of Trust B's assets. Asset 6 is with the necessary connection and accounts for 9% of Trust B's assets.

Trusts A and B are resident fixed trusts and the interests in them are assets with the necessary connection with Australia.

Scenario 1

Trust B sells Asset 4 and makes a capital gain of $700, which is included in its net income. Trust A is presently entitled to that net income and Leo is presently entitled to Trust A's net income ($700).

Leo adds $700 to his assessable income under subsection 98A(1) (because he is a beneficiary described in subsection 98(4)). Leo will have an extra capital gain of $700 under subsection 115-215(3), which will be disregarded under subsection 768-605(2) because it is attributable to an asset without the necessary connection with Australia.

Scenario 2

Trust A sells its interest in Trust B and makes a capital gain of $2,000. This is included in Trust A's net income to which Leo is presently entitled. Leo will add $2,000 to his assessable income under subsection 98A(1) and he will have an extra capital gain of $2,000 under subsection 115-215(3).

The extra capital gain will be disregarded under subsection 768-605(2) if the conditions in section 768-610 are satisfied. The condition in subsection 768-610(2) is satisfied for Trust B because at least 90% of its assets are without the necessary connection. There is no need to satisfy the condition in subsection 768-610(4).

Exception to CGT event E4 for distributions of foreign source income to foreign resident beneficiaries

1.39 No liability to tax arises under Division 6 of the ITAA 1936 where a foreign resident beneficiary of a trust is presently entitled to a share of the trust's net income and that share is not Australian sourced. However, when this amount is distributed to the beneficiary, the distribution may be a non-assessable amount for the purposes of CGT event E4 in section 104-70 of the ITAA 1997. CGT event E4 reduces the cost base of a taxpayer's unit or interest in a trust and it may result in a capital gain.

1.40 An exception to CGT event E4 is provided so that it does not apply to a payment that is reasonably attributable to income that is not Australian sourced. This will ensure that income of a trust that is foreign sourced can flow through the trust to a foreign resident beneficiary without having adverse CGT consequences. [Schedule 1, item 4, subsection 104-70(9)]

1.41 There is no specific exception to CGT event E4 for a distribution of an amount that is disregarded under subsection 768-605(2). This is because income to which subsection 768-605(2) relates is added to the assessable income of a foreign resident (although not in its taxable income because of the deduction allowed under subsection 115-215(6) or section 768-615) (see Examples 1.5 and 1.6). The fact that the amount has been added to the foreign resident's assessable income means that CGT event E4 does not happen when the amount is distributed.

Record keeping

1.42 The requirement to keep records in Division 121 of the ITAA 1997 will apply in relation to capital gains and capital losses that are disregarded under the new Subdivision 768-H. [Schedule 1, item 5, subsection 121-30(2)]

Application provisions

1.43 The new Subdivision 768-H of the ITAA 1997 applies to capital gains and capital losses made on or after the day on which this bill receives Royal Assent:

•

a capital gain or capital loss will be disregarded under subsection 768-605(1) where the gain or capital loss is made by the beneficiary on or after the day of Royal Assent; and

•

the interaction of subsection 768-605(2) and section 115-215 of the ITAA 1997 means that a capital gain will be disregarded under subsection 768-605(2) if, on or after the day on which this bill receives Royal Assent, a beneficiary's assessable income includes an amount under a provision specified in paragraph 115-215(2)(b).

[Schedule 1, subitem 7(1)]

1.45 The amendment to section 104-70 of the ITAA 1997 applies to payments made on or after the day on which this bill receives Royal Assent. [Schedule 1, subitem 7(2)]

Consequential amendments

1.46 A reference to the deduction allowed to a foreign resident that is a company and a beneficiary of a fixed trust is added to the table of specific deductions in section 12-5 of the ITAA 1997. [Schedule 1, items 1 to 3, section 12-5]