Has the death knell been rung for non-residents investing in non-real estate assets via Australian discretionary trust structures?
It certainly seems so following the unfavourable decision handed down by the Full Federal Court of Australia in Peter Greensill Family Co Pty Ltd (Trustee) v Commissioner of Taxation  FCAFC 99.
Many would remember when the Federal Court decision in Peter Greensill Family Co Pty Ltd (trustee) v Commissioner of Taxation  FCA 559, was handed down last year and how it challenged long held views of how the Australian capital gains tax laws should apply to non-resident beneficiaries of Australian discretionary trusts.
In essence, the long held view was that a non-resident should not be subject to tax in Australia on capital gains derived unless the asset being sold was taxable Australian property (broadly being, direct or indirect investments or interests in Australian real estate), regardless of whether the non-resident made the gain directly, or indirectly through a trust.
This view was based on the interaction of two sets of rules: the capital gains tax exemptions for non-residents; and the general trust taxation rules. Under the capital gains tax exemption rules, non-residents can broadly disregard capital gains arising from CGT assets other than taxable Australian property. Under the general trust taxation rules, trusts are considered “flow-through” entities on the basis they generally distribute their income and capital to the underlying beneficiaries, who then pay tax instead of the trustee. It has long been thought that this flow-through treatment allowed non-resident beneficiaries to access the general exemption for capital gains arising from non-taxable Australian property in the same manner as they would have if they derived the capital gain directly.
The Australian Taxation Office first publicly disputed this view in a discussion paper published in 2016, and then more formally followed this up with draft taxation determinations in 2019. The ATO’s position was that a non-resident could not access the capital gains exemption where the non-resident received the capital gain through a distribution by an Australian discretionary trust (or any other non-fixed trust). This was because the general exemption requires that the non-resident make a capital gain from a CGT event that happened to them – which could not be satisfied as the CGT event happened to the trustee. Additionally, where the trust making the gain is non-fixed, the specific CGT exemption that applies to fixed trusts, by definition, cannot apply.
Unfortunately for taxpayers (and their advisers), the Federal Court not only agreed with the ATO’s view in Greensill decision, but also in N & M Martin Holdings Pty Ltd v Commissioner of Taxation  FCA 1186. In both cases, the Federal Court held that the trustees of the relevant trusts were taxable on the distributed capital gains. This was notwithstanding the fact that if the beneficiaries had sold the assets themselves, or if the relevant trusts had been fixed trusts, the outcome would have been different as the capital gains would have been disregarded.
Since the news that both decisions were being appealed (and heard together given their similarities), taxpayers and advisers alike have been eagerly hoping for the Federal Court decisions to be overturned.
Sadly, in a unanimous decision, the Full Federal Court has dismissed the taxpayers’ appeals and affirmed the ATO’s view. Given the unanimous decision, it is unlikely (though not impossible) that this decision will be further appealed to the High Court of Australia.
Accordingly, unless the legislation is changed, we are all left with this “anomalous and capricious result” (as argued by Counsel for Greensill) and the realisation that Australian discretionary trusts may no longer be a desirable vehicle for non-residents to invest in non-taxable Australian property. Therefore, taxpayers with existing structures should be reviewing their circumstances and seeing what, if any, strategies exist to help mitigate their future tax exposures.
In addition, with the end of the financial year fast approaching, trustees may need to rethink their tax planning and pay careful consideration to who capital gains are distributed to for the 2021 income year given the outcome of this case.
Should you have any queries about your existing investment entity, or wish to discuss how this case might impact you in the future, please contact your usual Mazars advisor, the author or one of our specialist tax advisors
Author: Robert James
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