1 Will the X Trust's "net income", for Australian tax purposes only include income and gains derived on and after 1 July 20BB - and therefore will not include any income or gains derived before 1 July 20BB (and will not include, for the avoidance of doubt, any notional gain arising for ZZ tax purposes as a result of the X Trust ceasing to be a resident of ZZ, for ZZ tax purposes) - and thus, the migration of the X Trust to Australia will not result in any immediate Australian tax liabilities?
Yes Question 2 Will the migration of the X Trust to Australia, and the X Trust becoming a resident trust estate, result in any amount being included in the assessable income of any beneficiary under section 99B of the Income Tax Assessment Act 1936? Answer No This ruling applies for the following periods: Year ended 30 June 20XX Year ended 30 June 20XX Year ended 30 June 20XX The scheme commences on: 1 July 20XX
X X was born in YY on HH and has been an Australian resident (for Australian tax purposes) since JJ. X lived in ZZ from KK until JJ and married Y (an Australian citizen) in MM. X is affiliated with two family discretionary trusts - the X Trust and the Y Trust. The Y Trust is a ZZ Trust. The X Trust The X Trust is a trust governed by the Laws of the one of the political subdivisions of ZZ and was established (settled) on NN. It is a discretionary family trust. The beneficiaries of X Trust are listed in the X Trust Deed as: (i) X (ii) Y (iii) X's "Issue" (meaning "lineal descendants"..."whenever born or adopted") (iv) any persons or class of persons declared to be Beneficiaries by the Protector (where "Protector" is defined in the X Trust Deed as "X" or X's "Personal Representative") (v) R, a ZZ corporation, with effect from OO. From MM, the Trustee of the X Trust was Z. Z is a licensed ZZ private trust company based in ZZ. We have been advised that Z deals at arm's length with X and neither X or any person related to X has any equity stake or interest in Z.
Prior to Z becoming Trustee of the X Trust (on MM), X was the Trustee of the X Trust from NN. Prior to the December 20AA reorganisation, the X Trust owned 100% of P (a ZZ company), which in turn owned A of Q (a ZZ company). The X Trust owns no real estate interests in ZZ or elsewhere. The "migration" of the X Trust On 1 July 20BB, it is proposed that Z will resign as Trustee of X Trust and a new Australian resident trustee will be appointed (W). For ZZ tax purposes, when the X Trust ceases to be a resident trust of ZZ, the X Trust will be treated as disposing of its assets at their market values at the relevant time. No portion of any income or gains derived by the X Trust before 1 July 20BB will be included in the attributable income of the X Trust. The X Trust will not have any Australian sourced capital gains or any Taxable Australian Real Property (TARP) gains in the year ended 30 June 20BB. The X Trust will be a Controlled Foreign Trust (CFT) within the meaning of that term in section 342 of the Income Tax Assessment Act 1936 (ITAA 1936).
Further, the December 20AA reorganisation will not result in the X Trust deriving any Eligible Designated Concession Income (EDCI). This is because the income of the X Trust is not from an entity or entities that would be an 'investment corporation', 'mutual fund corporation' or 'international banking centre' (within the meaning of those terms in Regulation 17 of the Income Tax Assessment (1936 Act) Regulation 2015 (ITR 2015)), which would result in passive income and/or tainted services income needing to be included as attributable income of the X Trust. Also, no special rules apply to reduce the tax burden to a rate that is less than would otherwise typically apply to a private corporation resident in ZZ. P In NN, shortly after the X Trust was established, the Trustee of the X Trust acquired V Class A shares in P for nominal consideration. Prior to December 20AA, P's assets included: (i) A interests in the common shares of Q and S (ii) Cash and cash equivalents (iii) public shares and bonds in ZZ and foreign currencies. In December 20AA, the substantial majority of those P assets were sold to the X Trust and these are now held by the X Trust.
Before (or shortly after) 30 June 20BB, P will be liquidated and wound up. After this date, X (who currently holds V Class B (voting-only) shares in P), the X Trust, the Y Trust and T (a ZZ company) will not own shares in P. No portion of any income or gains derived by P before 1 July 20BB will be included in the attributable income of P. Further, the December 20AA reorganisation will not result in P deriving any EDCI (as neither P, or any other entities that are part of P's ZZ Group of entities would be an 'investment corporation', 'mutual fund corporation' or 'international banking centre' (within the meaning of those terms in Regulation 17 of the ITR 2015), which would result in passive income and/or tainted services income needing to be included as attributable income of P. Also, no special rules apply to reduce the tax burden to a rate that is less than would otherwise typically apply to a private corporation resident in ZZ. Q In NN, shortly after the X Trust was established and the X Trust acquired shares in P, X transferred to P (in exchange for shares in P issued to the X Trust), certain shares representing (at that time) B% of the issued capital in Q.
Those Q shares now represent A% of Q's common shares as a result (among other things), of a share buyback by Q of an unrelated member's shares. Until PP, Q (through its subsidiaries) carried on a business overseas. That business was sold to a Fund in 20PP and (at the request of this Fund), Q has retained a C% interest in one part of that business. This C% interest in the business is owned by Q through S. Q owns 100% of the preferred stock in S. As part of the reorganisation that took place following the sale of the business to the Fund in 20PP and as a result of the December 20AA reorganisation, the X Trust now owns a A% interest in Q and S. Share ownership - Q & S The ordinary (common) shares in Q and S are held by a small number of unrelated shareholders that are resident in ZZ and Australia. Q and S's ordinary voting shares are owned by: (i) FF (Australian resident) - D% (ii) D - E% (iii) the X Trust - A%. T T was incorporated in order to acquire a minority equity interest (G%) in U, which carries on a project in ZZ. The issued share capital of T is as follows: (i) V Class A1 (non-voting, common/ordinary) shares - held by the Y Trust
(ii) V Class B (voting-only) - held by X. Due to the rights attaching to T's classes of share, any increase in the value of T is reflected in an increase in its value of the Class A1 shares. U's ordinary voting shares are owned by: (i) D - F% (ii) T (ZZ resident) - G%, and (iii) the balance of shares is held by a number of minority investors. Proposed Scheme December 20AA reorganisation It has been proposed that the legal structure of the X Trust's ownership of P and P's ownership of shares in Q will be reorganised and simplified in December 20AA before the end of the ZZ tax year (which occurs on 31 December 20AA) (December 20AA reorganisation). As part of this December 20AA reorganisation, P transferred the majority of its assets (in mid-December 20AA) to the X Trust - in particular, P's A share interests in Q and S. As a result of the December 20AA reorganisation, the X Trust's assets currently comprise: (i) the A share interests in Q and S (ii) cash and cash equivalents (iii) public shares and bonds in ZZ and foreign currencies (iv) a small number of private investments previously held by P.
It has been advised that the December 20AA reorganisation was already subject to ZZ tax in accordance with the tax legislation in ZZ . Change of Trustee for X Trust In early July 20BB (to coincide with the commencement of the Australian 20BB/CC income year), Z will retire as Trustee for the X Trust and W (an Australian resident company) will then be appointed as the new Trustee of the X Trust. Early Engagement interactions We note that the scheme and facts outlined above have already been the subject of an early engagement and you are now applying for a private ruling to confirm what was discussed during these early engagement interactions.
Income Tax Assessment Act 1936 subsection 95(1) Income Tax Assessment Act 1936 section 99B Income Tax Assessment Act 1936 section 342 Income Tax Assessment Act 1936 subsection 347(1) Income Tax Assessment Act 1997 sub section 855-50(1) Income Tax Assessment Act 1997 sub section 995-1(1) Income Tax Assessment (1936 Act) Regulation 2015 Regulation 17
Question 1 Will the X Trust's "net income", for Australian tax purposes only include income and gains derived on and after 1 July 20BB - and therefore will not include any income or gains derived before 1 July 20BB (and will not include, for the avoidance of doubt, any notional gain arising for ZZ tax purposes as a result of the X Trust ceasing to be a resident of ZZ, for ZZ tax purposes) - and thus, the migration of the X Trust to Australia will not result in any immediate Australian tax liabilities? Answer Yes Detailed reasoning Relevant legislative provisions Subsection 95(1) of the ITAA 1936 defines 'net income' in relation to a trust estate as follows:
... the total assessable Income of the trust estate calculated under this Act as if the trustee were a taxpayer In respect of that income and were a resident, less all allowable deductions, except deductions under Division 393 of the Income Tax Assessment Act 1997 (Farm management deposits) and except also, in respect of any beneficiary who has no beneficial interest in the corpus of the trust estate, or in respect of any life tenant, the deductions allowable under Division 36 of the Income Tax Assessment Act 1997 in respect of such of the tax losses of previous years as are required to be met out of corpus. A trust may be required to work out its net income in a special way by Division 266 or 267 in Schedule 2F to this Act or Division 275 of the Income Tax Assessment Act 1997. [our emphasis] Further, subsection 95(2) of the ITAA 1936 provides the following in relation to the definition of 'resident' trust estate: 95(2) For the purposes of this Division, a trust estate shall be taken to be a resident trust estate in relation to a year of income if: (a) a trustee of the trust estate was a resident at any time during the year of income; or... [our emphasis]
Subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) defines 'income year' by reference to the term 'financial year' (which is also defined in subsection 995-1(1) of ITAA 1997) as 'a period of 12 months beginning on 1 July. 1 Section 855-50 of ITAA 1997 sets out the capital gains tax (CGT) consequences of a trust becoming a resident trust for CGT purposes, as follows: 855-50(1) If a trust becomes a 'resident trust for CGT purposes, there are rules relevant to each CGT asset that the trustee owned just before the trust became a resident trust for CGT purposes, except one: (a) that is 'taxable Australian property; or (b) that the trustee 'acquired before 20 September 1985. 855-50(2) The first element of the 'cost base and 'reduced cost base of the asset (at the time the trust becomes a 'resident trust for CGT purposes) is its 'market value at that time. 855-50(3) Also, Parts 3-1 and 3-3 apply to the asset as if the trustee had 'acquired it at the time the trust became a 'resident trust for CGT purposes. Exception 855-50(4)
This section does not apply to a trust if, just before it became a 'resident trust for CGT purposes, it was a *CFT because of paragraph 342(a) of the Income Tax Assessment Act 1936. [our emphasis] Section 342 of ITAA 1936 relevantly defines a CFT as follows: A trust is a CFT at a particular time if, at that time, the trust is not an Australian trust and: (a) there is an eligible transferor in respect of the trust; or... Subsection 347(1) of ITAA 1936 defines 'eligible transferor' (in relation to a discretionary trust) as: An entity (in this section called the "transferor entity") is an eligible transferor in relation to a discretionary trust at a particular time (in this section called the "test time") if the trust is not a public unit trust at the test time and: (b) all of the following subparagraphs apply: (i) the transferor entity transferred property or services to the trust at any time before the IP time; (ii) the underlying transfer was not an eligible business transaction;
(iii) at any time after the IP time and before the test time, the entity was in a position to control the trust; and, at the test time, the transferor entity is an Australian entity or a CFE [Controlled Foreign Entity] IP time is defined in the EM to Taxation Laws Amendment (Foreign Income) Act 1990 as ''7.30 pm, by standard time in the Australian Capital Territory, on 12 April 1989". Application of the law Subsection 855-50(4) of ITAA 1997 - Controlled Foreign Trust exception Section 855-50 of the ITAA 1997 will treat the first element of the cost base of each non-Taxable Australian Property (TAP) CGT asset the X Trust owned (and which was acquired after 20 September 1985), just before it becomes an Australian resident, as its market value at the time it become an Australian resident. However, if just before becoming an Australian resident, a trust is a CFT pursuant to section 347 of the ITAA 1936, because there is an 'eligible transferor' in respect of this discretionary trust (that is, because subsection 342(a) ITAA 1936 applies), the deemed acquisition at market value rules do not apply pursuant to subsection 855-50(4) of ITAA 1997.
For the exception in subsection 855-50(4) of ITAA1997 to apply, the X Trust must be a CFT because of section 342(a) of the ITAA 1936. According to paragraph 15 (in the 'Relevant facts and circumstances' above), the X Trust will be an 'eligible transferor' within the meaning of that term in subsection 347(1) of the ITAA 1936 and X will be the transferor entity that is an 'Australian entity' (pursuant to subsection 347(1) of the ITAA 1936). Therefore, as the X Trust is a CFT because X is an 'eligible transferor' pursuant to section 342(a) of the ITAA 1936, the exception in subsection 855-50(4) of the ITAA 1997 applies and the deemed acquisition at market value rules do not apply to the non-TAP CGT assets of the X Trust. Subsection 855-50(2) of ITAA 1997 - Market value rule not applicable It also follows from the above that, the first element of the cost base of the non-TAP CGT assets held by the X Trust will not be taken to be their market value/s when the X Trust becomes an Australian resident, but rather, the market value when the assets were acquired. Subsection 95(2) of ITAA 1936 - Resident trust estate
Since the Trustee of the X Trust will not change to an Australian resident company (W) until or after 1 July 20BB, the X Trust will not become a 'resident (Australian) trust estate' until or after 1 July 20BB. Therefore, any income or capital gains derived before that time should not be included in the X Trust's assessable (net) income. Any income or capital gains derived before 1 July 20BB will only not be included in the X Trust's assessable (net) income if there is no EDCI attributed to P or the X Trust. Also, any Australian sourced capital gains or any TARP gains would still be assessable to the X Trust before 1 July 20BB. Pursuant to the 'Relevant facts and circumstances', we understand that the X Trust (or P) will not have any EDCI, any Australian sourced capital gains or any TARP gains for the year ending 30 June 20BB.
Once the X Trust is an Australian resident from 1 July 20BB, foreign and Australian sourced income as well as capital gains are included for the purposes of calculating "net income" of the X Trust, regardless of the source of that income. However, we note that Foreign Income Tax Offsets (FITOs) may be available in relation to the foreign tax that has already been paid on income, profits or gains (including gains of a capital nature) that are included in the "net income" of the X Trusts from 1 July 20BB. Subsection 95(1) of ITAA 1936 - Net income of resident trust estate According to the terms of subsection 95(1) of the ITAA 1936, the net income of a trust estate is calculated by reference to when a taxpayer was an Australian resident. As such, any income which would be included in the net income of the X Trust would be calculated from when the X Trust became an Australian resident (on or after 1 July 20BB). Any notional gain arising for ZZ tax purposes as a result of the X Trust ceasing to be a resident of ZZ, will therefore not be included in the net income of the X Trust, whether that notional gain occurs before 1 July 20BB.
On or after 1 July 20BB as a result of the X Trust ceasing to be a resident of ZZ for ZZ tax purposes (and where the X Trust is now an Australian resident), all foreign and Australian sourced income as well as capital gains are included for the purposes of calculating the net income of the X Trust - regardless of the source of that income. Again, we note that FITOs may be available in relation to the foreign tax that has already been paid in ZZ on income, profits or gains (including gains of a capital nature) that are included in the "net income" of the X Trust from 1 July 20BB. Question 2 Will the migration of the X Trust to Australia, and the X Trust becoming a resident trust estate, result in any amount being included in the assessable income of any beneficiary under section 99B of the Income Tax Assessment Act 1936? Summary No, the migration of the X Trust to Australia to become a resident trust estate as described in this ruling, will not of itself result in any amount being included in the assessable income of any beneficiary under section 99B of the ITAA 1936. Detailed reasoning Legislative Provisions Section 99B of the ITAA 1936 provides as follows:
99B(1) [Amounts paid to, or applied for benefit of, beneficiary] Where, at anytime during a year of income, an amount, being property of a trust estate, is paid to, or applied for the benefit of, a beneficiary of the trust estate who was a resident at any time during the year of income, the assessable income of the beneficiary of the year of income shall, subject to subsection (2), include that amount. 99B(2) [Amounts not included in assessable income] The amount that, but for this subsection, would be included in the assessable income of a beneficiary of a trust estate under subsection (1) by reason that an amount, being property of the trust estate, was paid to, or applied for the benefit of, the beneficiary shall be reduced by so much (if any) of the amount, as represents: (a) corpus of the trust estate (except to the extent to which it is attributable to amounts derived by the trust estate that, if they had been derived by a taxpayer being a resident, would have been included in the assessable income of that taxpayer of a year of income);
(b) an amount that, if it had been derived by a taxpayer being a resident, would not have been included in the assessable income of that taxpayer of a year of income; (ba) an amount that is non-assessable non-exempt income of the beneficiary because of section 802-17 of the Income Tax Assessment Act 1997; (c) an amount: (i) that is or has been included in the assessable income of the beneficiary in pursuance of section 97; or (ii) in respect of which the trustee of the trust estate is or has been assessed and liable to pay tax in pursuance of section 98, 99 or 99A; or (iii) that is reasonably attributable to a part of the net income of another trust estate in respect of which the trustee of the other trust estate is assessed and is liable to pay tax under subsection 98(4); (d) an amount that is or has been included in the assessable income of any taxpayer (other than a company) under section 102AAZD; or (e) if the beneficiary is a company - an amount that is or has been included in the assessable income of the beneficiary under section 102AAZD. 99B(2A) [Excluded amounts]
An amount that is not included in a beneficiary's assessable income because of paragraph (2)(d) or (e) is not assessable income and is not exempt income. 99B(3) [ company] In paragraphs (2)(d) and (e): • company means a company other than a company in the capacity of a trustee. Application of the law If there will be no amount of money or other property being "paid to, or applied for the benefit of, a beneficiary" of the X Trust when there is a change of Trustee (to W), the event of changing the Trustee - as described above in the 'Relevant facts and circumstances'- will not of itself result in an amount being included in the assessable income of a beneficiary of the X Trust pursuant to section 99B of ITAA 1936. That said, we note that 99B may apply to property paid to or applied to a beneficiary after the trust becomes a resident trust, including where distributions relate to amounts derived whilst the trust was a foreign resident.