TD 2016/D5 – A ‘non-resident trust’ can ignore capital gains under Div 855 but beneficiaries can’t escape s99B assessment if those amounts are paid to them when they are ‘resident’

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

The draft determination asks: where an amount included in a beneficiary’s assessable income under subsection 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936) had its origins in a capital gain from non-taxable Australian property of a foreign trust, can the beneficiary offset capital losses or a carry-forward net capital loss (‘capital loss offset’) or access the CGT discount in relation to the amount?

The Commissioner proposes to rule:

1. No. The amount included in the beneficiary’s assessable income under subsection 99B(1) of the ITAA 1936 is not treated as a capital gain for capital loss offset or CGT discount purposes.

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

8. Depending on the terms of the particular trust deed (and the trustee’s actions pursuant to it), the amount attributable to the gain may be treated as income or corpus of the trust for trust law purposes.
9. An amount attributable to the capital gain may nonetheless be assessable to the beneficiary under subsection 99B(1) of the ITAA 1936.
10. Subject to subsection 99B(2) of the ITAA 1936, subsection 99B(1) requires a beneficiary to include in their assessable income an amount of trust property that is paid to, or applied for their benefit, provided the beneficiary was resident at any time during the income year in which the payment or application was made.
11. The amount made assessable by subsection 99B(1) of the ITAA 1936 does not have the character of a capital gain for Australian tax purposes, nor is there any linkage between subsection 99B(1) and Subdivision 115-C of the ITAA 1997.
12. Subsection 99B(2) of the ITAA 1936 excludes certain amounts from the scope of section 99B. Most relevantly:

• Paragraph 99B(2)(a) of the ITAA 1936 excludes an amount representing corpus of the trust estate, except to the extent to which it is attributable to amounts derived by the trust estate that, if they had been derived by ‘a taxpayer being a resident’, would have been included in the assessable income of that taxpayer for a year of income.
• Paragraph 99B(2)(b) of the ITAA 1936 excludes an amount that, if it had been derived by a taxpayer being a resident, would not have been included in the assessable income of that taxpayer of a year of income.

As a resident taxpayer could not have excluded the Div 855 gains from its/his/her assessable income (because Div 855 only applies to ‘non-residents’), s99B(2) would not protect a beneficiary from s99B(1) assessment.

[TD 2016/D5] [LTN 232, 30/9/16]