Taxable Australian Property and Capital Gains Tax
If you currently own, planning to invest in foreign assets, or later become an Australian beneficiary of via a foreign trust, then there may be some unintended but serious consequences when it comes to capital gains tax.
The ATO Commissioner has recently released draft determinations that are likely to impact Australian beneficiaries of distributions from foreign trusts where there has been a capital gain.
Normally, the net income of any trust is calculated as if the trustee is an Australian resident individual. As a result, foreign-source income is currently allocated to presently entitled Australian beneficiaries regardless of where the trust is located.
However, in the draft determination (TD 2016/D4), the Commissioner has concluded that where capital gains arise, another rule, i.e. s.855-10, overrides the general residency assumption. If you currently own or are planning to invest in foreign assets via a foreign trust, then there may be some unintended but serious consequences when it comes to capital gains tax.
It will be the same case even if you did that as a foreign resident and then came to Australia later and became a beneficiary who receives a distribution from realisation of the assets in the foreign trust. The determination will expose resident beneficiaries to a different tax treatment that has quite significant impacts.
Non-TAP Capital Gains to be Treated as Statutory Income
The consequences for Australian-based taxpayers is that a non-TAP (Taxable Australian Property) capital gain is not allocated to beneficiaries in the usual manner, nor is it taxed to the trustee.
Instead, when the capital gain is physically distributed, it is considered as statutory income under a separate tax provision: s.99B.
The result is that where any distributions are included in the beneficiary’s assessable income, it cannot be offset against capital losses or access the CGT discount in relation to the gain.
So What is Taxable Australian Property (TAP)?
- Taxable Australian real property (e.g. land or buildings, including the mining rights over materials located in Australia)
- Indirect interests in Australian real property
- Assets used within a business through a permanent establishment in Australia i.e. a fixed place of business through which the business operates in Australia.
- Options and rights to acquire these types of assets
- Assets that attract capital gains tax that creates a CGT event when a taxpayer ceases to be an Australian tax resident and elects to defer their CGT liability.
How Does This Impact Australians who Invest Through a Foreign Trust?
The tax consequences of the two draft determinations are adverse for an Australian taxpayer investing offshore through a foreign trust including:
- Direct ownership of foreign assets will enable investors to access the CGT discount on capital gains for eligible taxpayers, however, an investment through a foreign trust cannot (including investments made by Australian trusts through foreign sub-trusts).
- Capital gains on direct investments can be offset against capital losses, however, income classified as statutory income under s.99B cannot. This is because non-TAP capital gains will not be allocated to beneficiaries under the ordinary trust provisions. Instead, an Australian beneficiary could instead be taxed under transferor trust provisions and this may include an interest charge on subsequent distributions.
As an investor or beneficiary with off-shore assets, it is important to get the proper advice about how best to invest. An offshore trust is not always the best vehicle for investment, particularly for Australian residents.
We recommend speaking to one of our International Tax specialists to get an assessment of your exposure. They will be able to provide expert guidance on how to be tax-effective with off-shore investments.
For more information or to talk to one of our team, please call us on 02 9957 4033.
Last updated November 2017. This factsheet is provided for information purposes only and is correct at the time of publishing. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.