TD 2016/D4 – Commissioner proposes to rule that ‘foreign trusts’ do ‘disregard’ capital gains under s855-10, despite s95(1) directing trusts to calculate their tax law ‘net income’ as if they were a resident

The Commissioner issued this draft determination on Wed 30 Sept 2017.

The draft determination asks: does the residency assumption in the definition of the tax law definition of ‘net income’ (in s95(1) of the Income Tax Assessment Act 1936) apply for the purpose of s855-10 of the Income Tax Assessment Act 1997), which disregards certain capital gains of a trust which is a foreign trust for CGT purposes?

The Commissioner proposes to rule:

1. No. Accordingly, where a CGT event happens to a CGT asset of such a trust and that asset is not ‘taxable Australian property’:

• the trustee disregards any capital gain (or capital loss) from that event in calculating the net income of the trust under subsection 95(1) of the ITAA 1936, and
• Subdivision 115-C of the ITAA 1997 does not treat the trust’s beneficiaries as having capital gains (or make the trustee assessable) in respect of the event.

2. However, if an amount attributable to such a gain is paid or applied for the benefit of a resident beneficiary of the trust, the amount may be included in the beneficiary’s assessable income under section 99B of the ITAA 1936. The way in which section 99B applies is dealt with in draft Taxation Determination TD 2016/D5 (see next).

The Commissioner explains his rationale for this conclusion, as follows.

11. If the assumption in subsection 95(1) of the ITAA 1936 were applied for the purposes of section 855-10 of the ITAA 1997, the provisions would be in conflict. Section 855-10 would have no operation at all in relation to foreign trusts, despite its express reference to them. This cannot have been the intention of the legislature. It is a general (though rebuttable) rule of statutory interpretation that, where there is a conflict between general and specific provisions, the specific provision prevails.³
12. Subsection 95(1) of the ITAA 1936 is a general provision dealing with the calculation of the net income of a trust estate. In contrast, section 855-10 of the ITAA 1997 contains more specific rules in relation to capital gains made by a trustee of a trust that is a foreign trust for CGT purposes. In this context, it is considered that the reference to the trustee of a foreign trust in section 855-10 of the ITAA 1997 prevails over the assumption in subsection 95(1) of the ITAA 1936.

[TD 2016/D4] [LTN 232, 30/9/16]