In brief - Australian discretionary trusts may not be an optimal structure for holding assets where capital gains are to be distributed to foreign beneficiaries

The Full Federal Court has dismissed the taxpayer's appeal in Peter Greensill Family Co Pty Ltd (Trustee) v Commissioner of Taxation [2021] FCAFC 99. Assuming that the decision is not overturned on appeal, it means that an Australian discretionary trust may not be an optimal structure for holding assets that are not taxable Australian property, where the capital gain is intended to be distributed to a foreign beneficiary.

My May 2020 article Tax payable by foreign beneficiaries of non-fixed trusts on capital gains considers the decision of the single judge of the Federal Court.

To recap, the case concerned whether a foreign beneficiary of a discretionary trust was liable to tax on a capital gain distributed to it where the capital gain related to an asset that was not taxable Australian property. Taxable Australian property is broadly Australian real property and the business assets of a permanent establishment in Australia. The case concerned shares in an Australian financial services company.

The taxpayer argued that section 855-10(1) of the Income Tax Assessment Act 1997 (Cth) applied. That section allows a taxpayer to disregard a capital gain from a CGT event if:

  • the taxpayer is a foreign resident or the trustee of a foreign trust, and

  • the CGT event happens to an asset that is not taxable Australian property.

The appeal was heard at the same time as the appeal in N & M Martin Holdings Pty Ltd as trustee for the Martin Family Trust v Commissioner of Taxation, which concerned the same issue.

Full Federal Court's findings

The Full Federal Court agreed with the decision of the single judge. In essence, the Court found that there was no reason to interpret section 855-10(1) other than in accordance with its terms. 

The effect of the relevant taxing provisions for capital gains made by trust estates is that the relevant taxpayer for section 855-10(1) is the trust estate, not the beneficiary. As the trustee of the discretionary trust was not a foreign resident and the discretionary trust was not a foreign trust, section 855-10(1) did not apply. 

In so finding, the Court rejected the taxpayer's arguments that:

  • a capital gain of a trust estate must have a territorial connection with Australia for a foreign beneficiary to be taxed on the capital gain, and the territorial connection is that the capital gain must be from a CGT event happening to an asset that is taxable Australian property

  • section 855-10 does not require a direct connection between the capital gain and the CGT event

  • section 855-10 does not require that the CGT event happen to the foreign resident nor that the foreign resident be the owner of the asset

  • section 855-10 only requires that the capital gain be from a CGT event that happens to an asset that is not taxable Australian property

  • if section 855-10 applied to the capital gain taken to be made by the foreign beneficiary, the relevant taxing provisions either did not apply or the amount of the capital gain would effectively be reduced to nil

  • the construction of section 855-10 accepted by the single judge gave rise to the anomalous and capricious result that a capital gain made in relation to an asset that is not taxable Australian property would be disregarded if made by the foreign beneficiary directly, or if made by a foreign trustee regardless of the residence of the beneficiary

  • the legislature did not intend to change the tax treatment for foreign beneficiaries of Australian non-fixed trusts when the provisions were amended in 2011 to re-instate streaming of capital gains to beneficiaries.

The Court thought that there was an assumption underpinning the taxpayer's arguments that the legislature did not intend that foreign residents be taxable on capital gains from assets that were not taxable Australian property, but there was nothing in the express statement of the objects of Division 855 or the extrinsic material that required the provisions to be interpreted according to that assumption.

The Court also found that the source concept is not relevant to capital gains derived by trust estates and therefore endorsed the preliminary view of the Australian Taxation Office in TD 2019/D7.

Unfortunately this is another example of the taxing provisions for trusts producing an outcome that does not seem logical, and if the reasoning is fully applied may lead to other illogical outcomes. A rewrite of the provisions has been discussed for a long time and hopefully can be addressed soon.

The taxpayer has applied for special leave to appeal to the High Court.

This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2021.

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