On 10 June 2021, the Full Federal Court dismissed appeals against 2 separate decisions that trustees of resident discretionary trusts were assessable under s98 of the ITAA 1936 on capital gains made on the sale of shares that were not taxable Australian property (TAP) which were distributed to foreign residents – causing both taxpayers to lose their appeals. Tax Technical covered the first instance decision (see related article).
See below for further detail.
The taxpayer in each case was the trustee of a discretionary family trust, which sold shares that were not TAP and resolved to distribute the capital gains from the sale to a foreign resident beneficiary. In each case, the trust was a resident, even though the beneficiary was not.
At the heart of both these cases was the fact that there would have been not CGT, had the foreign beneficiary owned the shares themselves, as Div 855 of the ITAA 1997, did not impose Australian CGT on the sale of Australian shares (such as these) as they were not ‘taxable Australian property’. Underlying the way in which the taxpayers put their appeals was the idea that Subdiv 115-C operated so as to pass through the trust’s capital gains, to the beneficiary, on a totally transparent way, so as to deliver the same result, for a non-resident beneficiary, as if there was no Australian trust interposed.
Each taxpayer was assessed under s98 of the ITAA 1936 in respect of the capital gains. The taxpayers, however, argued that the capital gains should be disregarded by operation of s 855-10(1) of the ITAA 1997 as they were capital gains “from a CGT event” happening in relation to CGT assets that were not TAP.
- In the first case to be decided – Peter Greensill Family Co Pty Ltd v FCT [2020] FCA 559 – Thawley J held that s 855-10(1) did not apply to disregard the capital gains. (See related TT article.)
- Steward J followed that decision in the second case – N & M Martin Holdings Pty Ltd v FCT [2020] FCA 1186.
The Full Court has unanimously dismissed the taxpayers’ appeals in both cases (the appeals were heard together). The Court said that Thawley J (and thus Steward J as well) was correct to decide that:
- s 855-10(1) did not apply to the trustees of the respective trusts because they were not foreign residents and both trusts were resident trusts; and
- the amount calculated under s 115-225 that is added (by virtue of s 115-220) to a trustee’s assessment under s 98 of the ITAA 1936 is not an amount “from” a CGT event and therefore cannot fall within s 855-10(1).
The Full Court was unmoved (as were Thawley and Steward JJ) by the fact that the capital gains would have been disregarded if the foreign beneficiaries had made the gains directly (by operation of s 855-10), or if the trusts had been fixed trusts (by operation of s 855-40).
The ‘take away’ from this decision is that Subdiv 115-C only creates an arithmetic parallel to the Division 6 regime for taxing trusts, and only to a certain extent. It did not go as far as the taxpayers had hoped.
(Peter Greensill Family Co Pty Ltd (Trustee) v FCT [2021] FCAFC 99, Full Federal Court, Davies, Moshinsky and Colvin JJ, 10 June 2021.)
[LTN 110, 10/6/21]