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Trusts – Trusts and domestic share sales

Trust income for tax purposes, if the trust is an Australian resident trust, is always calculated as if the trust were a resident entity.

However, some transactions are problematic. What happens if one of the trust’s beneficiaries is a foreign resident? Such an issue arose recently before the ATO.

Resident trusts

A trust is resident in Australia calculates net trust income every year, and will normally lodge a trust return as if it were an entity. The trust will include in its calculations capital gains and losses from CGT events happening to its worldwide assets.
Non-resident beneficiaries
Where a beneficiary of the resident trust is a non-resident beneficiary as of the end of the income year, then the trustee may be assessed on any trust income of that year to which that beneficiary is presently entitled. If the beneficiary was entirely non-resident for the whole year, then the trustee is assessed for that beneficiary’s share of the Australian sourced income of the trust.

Problems with sourcing capital gains

The ATO dealt with a real life situation where a trust, with a beneficiary who was non-resident for the entire year, made capital gains from the sale of shares listed on the Australian Stock Exchange.
The trouble is that the source of capital gains from shares (or indeed from any assets) is not defined in statute under many circumstances. The ATO in this case was therefore obliged to apply common law principles to arrive at its conclusion.

Source of capital gains from share sales?

The trust happened to own some listed shares. The shares in this case were listed on the Australian stock exchange and were in Australian companies. The sales occurred in Australia.
In this case, the ATO concluded that the capital gain was sourced in Australia. The shares were in an Australian company and the disposal took place in Australia.
Since the capital gain was sourced in Australia, the trustee was liable to pay tax on the foreign resident beneficiary’s share of the capital gain.
For a more complicated situation where the shares are in foreign companies, see our companion article on Trusts and foreign capital gains.)

If you have concerns about trusts and domestic sourced income, call LAC Lawyers and we can provide advice and assistance.

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