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Court confirms Australian Tax Office's right to tax foreign residents' trust gains

Thursday, 14 May, 2020

The Federal Court of Australia’s decision last month in ATO v Greensill has put a major stumbling block in the path of non-resident beneficiaries of Australian discretionary trusts, law firm Herbert Smith Freehills (HSF) experts have said.

The decision essentially confirms the Australian Tax Office's (ATO’s) position in draft Taxation Determination TD 2019/D6 that the distribution of capital gains of an Australian-resident discretionary trust, derived from the disposal of shares that were not taxable Australian property (TAP) to a non-resident beneficiary, were deemed to be capital gains of the beneficiary and assessable to the trustee. It forces trust beneficiary Peter Greensill, formerly of Queensland but now a UK resident, to pay back tax on AUD60 million of capital gains.

Discretionary family trusts are common in Australia for asset protection, flexibility and succession planning purposes.  The effect of the court's finding in Peter Greensill Family Co Pty Ltd (trustee) v Commissioner of Taxation (2020 FCA 559) could jeopardise the continuing use of discretionary trusts because of the unnecessary tax cost they create, according to HSF.

The income arose from shares in London-based financing company Greensill Capital, held by the family trust and sold between 2015 and 2017, resulting in capital gains above AUD33 million, and paid to Greensill as a trust beneficiary. He argued that he was not liable for capital gains tax (CGT) as the gains were overseas assets and he is a UK resident. Taxing the gains would defeat against the purpose of the Income Tax Assessment Act 1997's foreign resident exemption; as the government's policy objective was not to tax foreign beneficiaries of resident trusts in respect of CGT events, in relation to assets that were not taxable Australian property, he claimed.

However, the federal judge, Thawley J, accepted the ATO's argument that, because the trust is Australian, the trustee should have to pay CGT relating to the shares attributable to Greensill.

'This is a result based on strict statutory interpretation which seems unreasonable', said Renuka Somers, Senior Tax Advisor at international advisors Asena. 'Such an assessment would not have arisen if the shares had been held by the beneficiary directly, or by the trustee of an Australian resident fixed trust, or a foreign trust.'

Experts at HSF called the ruling 'disappointing', noting that Greensill would have had no Australian tax liability if he himself, rather than the trust, had owned and disposed of the shares.

HSF noted that the judgment may be challenged in an appeal. But the real reason for the decision, it said, was defective drafting of the legislation. 'When the interim measures were enacted in 2011, the Minister promised “the operation of these amendments will be closely monitored and if unintended consequences are identified the government will act to remedy those consequences retrospectively”', said HSF. 'Hopefully, the current government will honour that promise.'