Many people thought that a non resident who derives a capital gain in respect of Australian assets will not be subject to Australian tax unless the assets concerned real property. In two recent cases, the Federal Court has held that where a non fixed trust distributes capital gains to a non resident of Australia then that capital gain is assessable to both the trustee of the trust and the non resident beneficiary – even where the asset generating the gain to the trust is not taxable Australian real property.
The decisions in Peter Greensill Family Co Pty Ltd v Commissioner of Taxation [2020] FCA 559 and N & M Martin Holdings Pty Ltd v Commissioner of Taxation [2020] FCA 1186 both concern the sale of shares by an Australian discretionary trust. In each cases the company whose shares were sold did not have assets that consisted predominantly of Australian real property. The capital gains were distributed to non resident beneficiaries of the trust in each case.
As Steward J succinctly observed in the Martin decision, "Mr Martin and Holdings, however, have a problem."
Had the non resident beneficiary directly held the underlying shares, then the capital gain would have been free of Australian CGT under section 855-10 of the Income Tax Assessment Act.
Had the trust been a fixed trust then the capital gain would have been free of Australian CGT under section 855-40 of the Income Tax Assessment Act. As the structure involved was a non fixed trust then this exemption did not apply and the gains were subject to tax.
The effect of these cases will become particularly problematic given the very narrow scope of a "fixed trust" for tax purposes. Most people would think that a unit trust is a fixed trust, however in almost all cases a unit trust will be regarded as non fixed and therefore subject to the same tax outcomes as an ordinary family discretionary trust.
Whether there is an appetite to amend the legislation to provide a broader range of trusts with the flexibility to distribute capital gains tax free to non residents remains to be seen.
In the meantime, it is important to remember that these cases do not represent a change to the law. It should be expected that the Australian Taxation Office will use the authority of these cases to revisit past distributions made by Australian trusts to non residents to ensure that the correct level of tax has been paid in respect of capital gains distributed to non residents.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Madgwicks is a member of Meritas, one of the world's largest law firm alliances.
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