The case of Peter Greensill Family Co Pty Ltd (as trustee) v Federal Commissioner of Taxation [2020] FCA 559 sought to determine whether the trustee was entitled to disregard its capital gains when it made a foreign resident beneficiary specifically entitled to those gains.
In making the decision, Judge Thawley found that:
- It was the trustee that made the capital gain.
- The trustee was not a foreign resident, so section 855-10 did not apply to the trustee.
- Section 855-10 also did not apply to the foreign resident beneficiary as the distribution was not a capital gain “from” a CGT event, but a distribution of “amount” equal to the capital gain made by the trustee.
In a blog, Murray Shume of Cooper Grace Ward Lawyers noted the capital gains tax event occurred in relation to shares that were not taxable Australian property.
“Under section 855-10 of the Income Tax Assessment Act 1997, foreign residents are entitled to disregard any capital gain or loss from a CGT event that happens in relation to a CGT asset that is not taxable Australian property,” Mr Shume said.
“In Greensill, Thawley J found that section 855-10 did not apply when foreign beneficiaries were specifically entitled to capital gains from an Australian resident trust. Therefore, the trustee was required to pay tax on the capital gain.”
Mr Shume said the decision has implications for distribution resolutions for the 2020 income year.
“In deciding how to make distributions of capital gains for this income year, trustees should consider the tax consequences of distributing capital gains to non-resident beneficiaries,” Mr Shume said.
It is right that the trustee pays tax on distributions to foreign residents, but it is not under the same provisions as the tax on accumulated income. There is a specific provision that taxes the Trustee on distributions to foreign beneficiaries (presumably due to the difficulty of collecting directly from the beneficiary if they choose not to lodge an Australian tax return), that is separate from the provision that taxes the Trustee on accumulated income.
The tax payable by the trustee will be 45% (except on dividends, royalties and interest which will be at normal withholding rates), however it is not a final tax and is akin to a withholding tax. The foreign beneficiary lodges an Australian tax return and is assessed at normal foreign resident rates and receives a credit for tax paid by the Trustee.
Doesnt sound right.
If a distribution is made the recipient is taxed on it. If the Trust gets taxed, is this at the penalty rate of 49%?