PART II – CGT and foreign resident beneficiaries

Changes to the tax law have increased the complexity of the taxation of capital gains for foreign resident beneficiaries of Australian trusts.  However, it is the more recent ATO interpretation of the law which is causing some headaches.

To recap on the legislative changes:

  • Since 8 May 2012 foreign residents have NOT been entitled to the CGT discount.  This includes capital gains received by foreign residents as a distribution from an Australian resident trust.  There are ongoing complex transition rules for assets acquired prior to that date.
  • The biggest issues are how to deal with:
    • Non-TAP (taxable Australian property) Australian sourced capital gains e.g. sale of ASX listed shares
    • foreign sourced capital gain (e.g. Sale of NASDAQ listed shares) flowing through an Australian resident trust

The Australian CGT system operates so that foreign residents are exempt from CGT on non-TAP.  Somewhat simplistically, TAP is interests held in Australian land (including via an entity) and interest in Australian business assets but does not include ‘no land’ companies and trusts.  As an example, the capital gain a foreign resident makes from selling BHP shares is tax-free in Australia.  However, if an Australian resident trust makes the BHP gain and distributes it to a foreign resident the gain is taxable to the trustee on behalf of the foreign beneficiary and the gain is not tax-free.  It can be argued that this is just bad tax planning as the gain is Australian sourced.

However, the issue that has come to a head which is not properly understood is that in December 2016 in a non-binding discussion paper, the ATO “changed” its position on the treatment of foreign source capital gains flowed through an Australian resident trust and distributed to a foreign resident.  Historically, the commonly accepted position was the capital gain on the Apple shares could flow through the Australian resident trust and be tax-free to the foreign beneficiary.

However, it appears the ATO view is that the non-resident beneficiary (and in the first instance, the trustee) is taxed on the foreign sourced capital gains.  This is an even more anomalous outcome given that the foreign sourced dividends from the investment, for example, would not be taxed and are able to flow through tax-free.

Pending the ATO changing its final position, the solution may be in a DTA – perhaps that’s a topic for Part III…..