The Australian Tax Office (ATO) have recently released two draft taxation determinations TD 2019/D6 and /D7, which address the tax treatment of capital gains distributed by Australian resident trusts to non-resident beneficiaries.
Generally, non-residents are only subject to Australian Capital Gains Tax (CGT) on Taxable Australian Property (TAP) which covers a wide range of items but mainly direct and indirect interests in Australian real property. As such, other assets (eg shares in non-property-owning Australian companies) would not be taxed in Australia, nor would shares in a foreign company held by a non-resident.
The ATO views in TD 2019/D6 and D7 complicate this position where a capital gain is made indirectly by the non-resident. The specific focus of these two Tax Determinations is in respect of distributions made from an Australian resident discretionary trust.
The impact of the two draft Tax Determinations, is that Australian tax would be payable where a gain on an Australian non-TAP asset or a foreign asset is distributed to non-resident taxpayer by a discretionary trust. The ATO’s view is that the trustee of the trust would be assessable as well as the non-resident taxpayer with the non-resident receiving a credit for the tax paid by the trustee.
This is a significant clarification, as the same non-TAP capital gain made by a non-resident taxpayer in their own right or indirectly from a fixed trust would be disregarded for Australian tax. Distributions from a fixed trust are specifically dealt with under the law to provide an exclusion, so too is an individual’s position.
Based on the draft Tax Determinations, trustees will need to carefully consider distribution strategies where there are non-resident beneficiaries and non-TAP or foreign capital gains. Historically, these might have been distributed to non-residents, but this may now not be the most preferential distribution strategy.
TD 2019/D7 (dealing with foreign capital gains) when finalised will come into effect for the 2019-20 tax year with no retrospective application. TD 2019/D6 is however, scheduled to apply before and after it is finalised.
Should you have any questions in relation to the above or be considering distribution strategies please contact your ESV engagement partner on 02 9283 1666.