The ATO has issued its preliminary view in TD 2019/D6 on capital gains made by foreign beneficiaries of Australian non-fixed trusts (including discretionary trusts).
Generally, a foreign resident is only taxed in Australia on capital gains made on taxable Australian property. Taxable Australian property includes:
- interests in Australian real property, including a mining, quarrying or prospecting right
- an interest of at least 10% of an entity where more than 50% of the market value of the entity’s assets is represented by Australian real property
- assets used in carrying on a business through a permanent establishment in Australia
There is a specific provision in section 855-40 of the Income Tax Assessment Act 1997 (Cth) that applies to beneficiaries of fixed trusts. The purpose of that provision is to apply the treatment set out above to capital gains made indirectly by foreign beneficiaries of fixed trusts. Critically, this provision does not apply to beneficiaries of trusts that are not fixed trusts.
Based on this, and the way the capital gains tax provisions have developed over time, the ATO considers that tax is payable in Australia where (subject to the application of a double tax agreement):
- a capital gain is made by the trustee of an Australian non-fixed trust
- the capital gain is taken to be made by a foreign beneficiary (for example where the foreign beneficiary is specifically entitled to the capital gain)
It doesn’t matter that the capital gain relates to an asset that is not taxable Australian property.
Tax is payable by the trustee of the trust and the foreign beneficiary is also liable for tax but receives a refundable tax offset for the tax paid by the trustee.
The position is even more punitive for temporary residents as tax is payable irrespective of whether the trust is fixed or non-fixed. This is because there is no equivalent to section 855-40 for temporary residents. A temporary resident is a holder of an Australian temporary visa that is not an Australian resident for social security purposes and does not have a spouse that is an Australian resident for social security purposes.
When TD 2019/D6 is finalised, it will have retrospective application.