The Federal Court of Australia recently handed down a decision which may alter the way tax non-residents structure their investments into Australia in the future.
The decision in Peter Greensill Family Co Pty Ltd (as trustee) v Federal Commissioner of Taxation (no 2)  FCA 597 has challenged the view of how the capital gains tax laws applying to foreign residents interacts with Australia’s tax code for trusts.
Foreign residents are not subject to tax on Capital Gains made in Australia unless the asset that is sold is ‘Taxable Australian Property’. Broadly this refers to a direct or indirect investment in Australian real estate. Gains on non-real property such as shares on the Australian stock exchange are disregarded if non-residents sell the assets directly.
In Australia, trusts are transparent (flow through) entities where they distribute the income or capital to the underlying beneficiaries. This means the beneficiaries pay tax rather than the trustee.
The long-held view was that if an Australian trust generates a capital gain on non-taxable Australian property and distributes it to a non-resident, the flow-through treatment should apply and the non-resident would be deemed to generate the gain itself. As the asset was not taxable Australian property, it should not be subject to tax in the hands of the non-resident.
The Court challenged this view on a technicality and concluded that because the trustee generated the gain rather than the beneficiary, the gain in the hands of the beneficiary was not ‘from’ a CGT event, but rather, an amount distributed by the trustee equal to the capital gain. This meant that the trustee of the trust was taxed.
This brings about the “absurd outcome” (as argued by the Counsel for Greensill) that if Mr Greensill had sold the shares himself, he would not have been taxed, but because the trust had sold the shares and distributed an amount reflecting the capital gain to Mr Greensill the trustee was subject to tax. Unfortunately, while the result may be unpopular, the Court ruled in the ATO’s favour. The decision is in line with an ATO Discussion paper published in 2016.
We hope this case is appealed. However, as this is now law, unless the legislation is changed, or the case is successfully appealed, non-resident investors will need to re-think the structure of future investments into Australia.
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 or one of our specialist tax advisors:
Published: 28 May 2020
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