The Australian Taxation Office (ATO) recently released Taxation Determinations TD 2019/D6 and TD 2019/D7 (together the Determinations) that concern Australian discretionary trusts distributing capital gains to foreign beneficiaries. The Determinations ‘complete the circle’ and follow Taxation Determinations TD 2017/23 and TD 2017/24 that concern foreign trusts distributing capital gains to Australian beneficiaries that we wrote about here.

As with TD 2017/23 and TD 2017/24, the Determinations will cause angst for taxpayers and their advisors when considering the interaction of Australia’s trust taxation rules and the cross-border distribution of capital gains.

The ATO says in TD 2019/D6 that a foreign beneficiary presently (or specifically) entitled to a capital gain made by an Australian discretionary trust on an asset that is not taxable Australian property (non-TAP) is assessable on the capital gain even though that would not occur if the foreign resident made the gain directly, or through a fixed trust, rather than through a discretionary trust.

The ATO continues in TD 2019/7 by saying that a foreign beneficiary of a discretionary trust is assessable on non-TAP capital gains irrespective of whether the gain has an Australian source or not.

The ATO notes in TD 2019/D7 that source is relevant to the application of section 99D, which in some cases can provide a foreign beneficiary with a refund of tax paid by the trustee under section 99A on income from foreign sources. Section 99D could potentially apply to all or part of a foreign source capital gain. However, the ATO notes that any refund entitlement under subsection 99D is subject to the discretion of the Commissioner to refuse a refund where there was a purpose of enabling the beneficiary to obtain the refund of tax.

An example to which TD 2019/D6 applies would be a capital gain from ASX listed shares distributed to a foreign beneficiary by an Australian discretionary trust. TD 2019/D7 takes the example further to, for example, the Australian discretionary trust distributing a capital gain from shares listed on (say) the New York Stock Exchange to the foreign beneficiary.

The Determinations do not affect the taxation of capital gains that arise from taxable Australian property (TAP).

The views in TD 2019/D7 appear to be (another) unintended consequence of the “interim” changes to Division 6 (and 115-C) to allow streaming capital gains following the High Court decision in Bamford. The ATO previously expressed similar views to those in TD 2019/D6 in Interpretative Decision 2007/60(although the 2011 changes assist the ATO views).

While the ATO views in the Determinations are controversial, those views are not surprising and replicate the views in a December 2016 ATO Consultation Paper (submissions on that Paper closed in August this year).

Date of effect

The ATO says when it finalises TD 2019/D6 it will apply before and after its date of issue. However, it will not apply to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of finalisation.

When finalised TD 2019/D7 will apply for the 2020 and later income years. However, it will not apply to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of finalisation.

For the 2019 and earlier income years, the ATO will not seek to disturb approaches taken for capital gains from non-TAP assets which are consistent with the source principles present in the pre-2011 streaming legislation (provided that such approaches are not artificial or contrived or otherwise have a dominant purpose of tax avoidance).

Division 6 that had its origins in 1915, the CGT provisions from 1985, Division 855 from 2007, and the post-Bamford rewrite of Subdivision 115-C from 2011 are not comfortable bedfellows. Legislative reform appears the only way to resolve the interactions between them. 

To discuss this further or for more information please contact:

Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E: nbrydges@sladen.com.au

Rob Warnock
Principal Lawyer | Chartered Tax Advisor
M +61 419 892 115 | T +61 3 9611 0155
E: rwarnock@sladen.com.au