Foreign investors beware! Are your non-TAP assets in the right structure?

By Jim Koutsokostas, Adam Dimac, Todd Bromwich and Luke Raams

In recent years, the ATO has ramped up its focus on the use of trusts by high wealth private groups. Continuing this trend, the ATO has finalised two tax determinations on the issues addressed in the 2021 Greensill case, which are essential reading particularly for foreign investors investing in Australian assets, including listed securities. This article summarises the key takeaways for investors and their advisors, and our practical tips.

Following the Full Federal Court’s decision in Peter Greensill Family Co Pty Ltd (Trustee) v Commissioner of Taxation [2021] FCAFC 99 (Greensill), and the High Court’s refusal to grant the taxpayer special leave to appeal, the Commissioner of Taxation has now released taxation determinations TD 2022/12 and TD 2022/13 (Determinations) in response to the issues considered in Greensill.

In Greensill, the Federal Court concluded that a non-resident beneficiary of an Australian resident non-fixed trust is assessable on their share of a capital gain of the trust, regardless of whether the gain is referable to assets that are not taxable Australian property (TAP).

The Greensill decision aligns with the Commissioner’s position set out in the draft versions of the Determinations released in 2019, prior to the Full Federal Court’s decision being handed down.

Our commentary on the original Federal Court decisions in Greensill and N & M Martin Holdings Pty Ltd v Commissioner of Taxation [2020] FCA 1186 can be read in Talking Tax – Issue 184 and Issue 190. Our commentary on the Full Federal Court appeal decision in Greensill can be read in Issue 199.

Key takeaways

As confirmed by Greensill and the Determinations, if an Australian resident non-fixed trust makes a capital gain from non-TAP assets and makes a non-resident beneficiary presently or specifically entitled to those gains:

• the trustee and beneficiary are assessable under sections 98 and 98A of the Income Tax Assessment Act 1936 (1936 Act) respectively, without regard to the source of the gains.
• the beneficiary cannot access the capital gains tax (CGT) exemption under section 855-10 of the Income Tax Assessment Act 1997 (1997 Act). This is because the amount on which a foreign resident beneficiary is taxed, by the combined operation of subsection 115-215(3) of the 1997 Act and section 98A of the 1936 Act, is not ‘a capital gain from a CGT event’ of the beneficiary, as required by the terms of the exemption. Rather, it is an amount calculated by reference to a capital gain arising from a CGT event that occurs in relation to a trust asset and included in the beneficiary’s assessable income accordingly. The anomaly here is that if the beneficiary owned the asset personally, the CGT exemption would ordinarily be available.
• as the trust is not a ‘fixed trust’, the CGT exemption in section 855-40 of the 1997 Act will not apply.

We now have a ‘structure bias’ in our CGT rules that should be considered when setting up Australian trust structures that are designed to hold non-TAP assets that will, or may, be held for the benefit of non-resident beneficiaries. In these cases, a ‘fixed trust’ (which is not necessarily equivalent to a unit trust – see PCG 2016/16) would provide a preferable tax outcome, as beneficiaries may be entitled to a CGT exemption under section 855-40 of the 1997 Act.

Division 855 was introduced in 2006 with the objective of improving Australia’s standing as an attractive place for foreign business and investment. The complexity of our CGT rules, as highlighted by the Greensill decision and the Determinations, appears to be inconsistent with this objective.

The Determinations will be applied by the Commissioner retrospectively, except to the extent they conflict with the terms of a settlement agreed to by the Commissioner before 31 August 2022.

Additionally, the Commissioner will not devote compliance resources to identifying non-compliance with TD 2022/12 in the 2019 and earlier income years. Curiously, this concession does not extend to the application of TD 2022/13. In any event, this does not prevent the Commissioner from considering these matters if an investigation or audit is commenced into a taxpayer’s affairs.

On a related note, if a non-resident trust makes a capital gain from non-TAP assets and makes an Australian resident beneficiary presently entitled to those gains, the beneficiary is taxed under section 99B, not section 97. The practical outcome of this is that any CGT concessions, such as the 50% CGT discount, cannot apply. For this reason, if clients wish to hold non-TAP assets for the benefit of Australian resident beneficiaries, it is generally preferable that they be held in an Australian trust structure, to allow the beneficiaries to access the 50% CGT discount. Refer to earlier taxation determinations TD 2017/23 and TD 2017/24.

For further details on the Determinations, continue reading below.

Read more

TD 2022/12

Sections 98 and 98A of the 1936 Act, generally only assess a resident trustee and non-resident beneficiary on so much of their share of the net income of the trust estate as is attributable to sources in Australia. This is known as the ‘source concept’.

The Commissioner considers that the source concept is not relevant in determining whether the capital gain of the resident trust is assessable to the trustee under section 98 of the 1936 Act, or a presently entitled non-resident beneficiary under section 98A of that Act.

This is because sections 115-200 and 115-215 of the 1997 Act do not take the source of a capital gain into account in determining the amount to be assessed to the trustee and beneficiary under sections 98 and 98A respectively.

This is a consequence of the post-Bamford trust streaming amendments made by the Tax Laws Amendment (2011 Measures No 5) Act 2011, which had the effect of removing the taxation of trust capital gains from Division 6 of the 1936 Act and establishing (the then-new) Subdivision 115-C of the 1997 Act.

TD 2022/13

Section 855-10 of the 1997 Act allows a non-resident entity, including a trustee of a foreign trust, to disregard a capital gain from a CGT event that occurs in relation to a non-TAP asset.

The Commissioner considers that this exemption cannot be accessed by a foreign resident beneficiary that is taxable on a capital gain made by an Australian resident non-fixed trust under section 115-215 of the 1997 Act and section 98A of the 1936 Act. This position was confirmed by the Full Federal Court in Greensill.

Additionally, the Commissioner notes in TD 2022/13 that the exemption available under section 855-40 can only apply to beneficiaries of fixed trusts.