Greensill's implications for taxing of trust capital gains 15 min read
The Full Federal Court has confirmed a controversial view held by the Commissioner of Taxation (the Commissioner) on the taxation of capital gains from non-taxable Australian property (broadly speaking, any property other than direct or indirect interests in Australian land) made by Australian resident discretionary trusts that are distributed to foreign resident beneficiaries. In Peter Greensill Family Co Pty Ltd v Commissioner of Taxation, the court ruled that such capital gains are taxable in Australia, despite the fact that if the non-taxable Australian property had instead been owned directly by the foreign resident, any capital gain would be exempt from tax.
- The Greensill decision will mainly be relevant to high net worth family groups that include discretionary trusts that are Australian resident due to having either an Australian resident trustee or central management and control in Australia.
- It means that all capital gains made by such trusts will be taxed in Australia, even if those gains arise from the disposal of non-taxable Australian property (eg shares in Australian or foreign companies with no Australian land or business presence) where either that property or its proceeds are distributed to foreign resident beneficiaries.
- The decision will not be relevant to foreign residents invested in a trust that is a 'fixed trust' (such as an attribution managed investment trust (AMIT)). For those trusts, capital gains made on non-taxable Australian property distributed to foreign resident beneficiaries are exempt from Australian tax.
- However, the definition of a fixed trust for these purposes is very strict. Foreign resident beneficiaries of Australian resident trusts that are not AMITs should ensure that their trust either satisfies the definition of a fixed trust, has successfully applied to the Commissioner to be deemed a fixed trust or qualifies for an administrative safe harbour compliance approach. Another alternative would be to amend the trust terms to improve the prospects of satisfying the fixed trust definition, although that risks triggering tax if it results in a 'resettlement' or 'split' of the trust.
- Subject to the outcome of any appeal, we would urge Parliament to reconsider whether the amendments it made to the taxation of trust capital gains in 2011 may have miscarried and resulted in inconsistent outcomes. Consistency in tax treatment may require further amendments, although whether these will pass the Parliament remains to be seen.
Australia's capital gains tax (CGT) regime came into effect in 1985. In essence, the CGT regime requires 'net capital gains' made by a taxpayer to be included in the taxpayer's 'assessable income' and therefore subject to Australian income tax. A trust is not a legal person separate from the trustee or beneficiary. Either the trustee or the beneficiary will be taxed on the assessable income (including net capital gains), referred to as 'net income', of the trust for the purposes of Australian income tax.
For many years, trustees have purported to distribute particular categories of trust income (including capital gains) to beneficiaries by making the beneficiary entitled thereto in a process commonly known as 'streaming'. Concerns about the efficacy of this process for tax purposes resulted in the introduction of Subdivision 115-C of the Income Tax Assessment Act 1997 (Cth) (the ITAA 1997) in 2011. In summary, subject to the terms of a trust, Subdivision 115-C permits trustees to effectively 'stream' capital gains to beneficiaries for tax purposes, resulting in beneficiaries being deemed to have made any capital gains distributed to them and being taxed on those gains accordingly, with the trustee taxed on any residual capital gains.
The application of the CGT regime to foreign residents, including foreign resident beneficiaries of Australian resident trusts, has changed over time. The most recent provisions were introduced as Division 855 of the ITAA 1997 in 2006. In summary, Division 855 provides that:
- a capital gain or loss made by a foreign resident or the trustee of a foreign trust as a result of a CGT event happening to non-taxable Australian property is disregarded and thus not taxed (s855-10); and
- a capital gain deemed to have been made by a foreign resident beneficiary of a fixed trust under Subdivision 115-C concerning non-taxable Australian property is disregarded and thus not taxed (s855-40). Importantly, this latter treatment is restricted to fixed trusts.
Obviously, this means that to the extent a capital gain is made as a result of a CGT event happening to taxable Australian property, that gain will always be taxable to either the trustee or beneficiary regardless of their residence.
The Commissioner's views on the interaction between the trust capital gains provisions in Subdivision 115-C and the foreign resident capital gains provisions in Division 855 have only been formalised relatively recently. In late 2017, the Commissioner made two public rulings regarding foreign resident trusts with Australian resident beneficiaries: TD 2017/23 and TD 2017/24.1 In summary, those rulings provided that any capital gain made by a foreign trust on non-taxable Australian property is disregarded by s855-10, and so cannot be deemed by Subdivision 115-C to have been made by an Australian resident beneficiary to which it is distributed. However, the Australian resident beneficiary may still be assessed on capital gains distributed to them under s99B of the Income Tax Assessment Act 1936 (Cth) (the ITAA 1936), which does not allow for the offsetting of capital losses or application of the CGT discount.2
More recently, in mid-2019, the Commissioner issued two further draft public rulings regarding the converse situation of Australian resident trusts with foreign resident beneficiaries: TD 2019/D6 and TD 2019/D7.3 In TD 2019/D6, the Commissioner adopted the position that a foreign resident beneficiary of an Australian resident non-fixed/discretionary trust cannot rely on Division 855 to disregard any capital gain they are deemed to have made because of Subdivision 115-C. In TD 2019/D7, the Commissioner adopted the position that such a gain would be taxable in Australia regardless of whether it had an Australian source, on the basis that the concept of source, which is relevant to the general trust taxation rules in Division 6 of the ITAA 1936 and the assessable income of foreign residents under s6-10 of the ITAA 1997, is not relevant to capital gains. Put simply, foreign resident beneficiaries of Australian resident discretionary trusts would be subject to Australian tax on deemed capital gains as a result of the distribution of the trust capital gains to them.
These views have created controversy for different reasons. The views in relation to Australian resident beneficiaries were controversial because the tax treatment of the beneficiary changed depending upon whether the trust was Australian resident or foreign resident. The views in relation to foreign resident beneficiaries were controversial because they render capital gains liable to Australian tax despite, on one view, those capital gains having no real nexus with Australia, given that they:
- do not relate only to taxable Australian property;
- do not have an Australian source; or
- are not distributed to an Australian resident beneficiary.
Many have argued that this position is inconsistent with the policy objects of the taxing regime more generally, which permits Australian resident individuals to offset capital losses against capital gains and apply the CGT discount to any remaining capital gains, and only taxes foreign residents on Australian-sourced assessable income and capital gains made on taxable Australian property. Importantly, this may be an inadvertent result of legislative action that was intended to be beneficial for taxpayers (namely, the trust capital gains streaming regime in Subdivision 115-C).
Greensill involved appeals against the first instance decisions in two cases, with the same basic facts, heard concurrently by the Full Federal Court.4
Both cases involved the trustee of an Australian resident discretionary trust that disposed of non-taxable Australian property: more specifically, sold shares in a company, the proceeds of which were then distributed to a foreign resident beneficiary of the trust. As a result of the disposals, the relevant trustee made capital gains under CGT event A1.5
One of the cases also involved the Australian resident discretionary trust distributing shares in specie to the foreign resident beneficiary. As a result of this distribution, the beneficiary became absolutely entitled to the shares, and both the trustee and beneficiary made capital gains under CGT event E5.6
The Commissioner subsequently issued assessments to the trustees and, in one case, the beneficiary. Broadly, this was on the basis that:
- the beneficiaries made deemed capital gains as a result of the operation of the trust capital gains streaming regime (in particular, s115-215 of Subdivision 115-C of the ITAA 1997); and
- where such a beneficiary with deemed capital gains is a foreign resident, the trustee is to be taxed under s115-220 of the ITAA 1997 and s98 of ITAA 1936 on an amount equal to those capital gains.
Taxing the trustee is effectively a collection mechanism, as the combined operation of s115-215 of the ITAA 1997 and s98A of the ITAA 1936 is that the beneficiary will also be taxed on those capital gains with a refundable credit for the tax paid by the trustee. Consequently, while formally the dispute was between the trustees and Commissioner, in substance it was between the beneficiaries and the Commissioner.
The taxpayers' objections to the assessments were disallowed, which they then appealed to the Federal Court. Their basic position was that the capital gains deemed to have been made by each beneficiary under Subdivision 115-C as a result of the trustee's disposal of the shares were capital gains 'from a CGT event' within the meaning of 855-10(1). It followed, so it was argued, that any capital gain amount deemed to have been made by each beneficiary under Subdivision 115-C was disregarded by Division 855, with the result that there was no capital gain amount upon which either trustee could be assessed under s115-220 of the ITAA 1997 and s98 of the ITAA 1936.
In a joint judgment, the Full Federal Court held that the Australian resident trustees were assessable on the capital gains resulting from the share disposals that they had distributed to the foreign resident beneficiaries. In each case, because the trustee made capital gains from each disposal, those capital gains were prima facie to be included in the calculation of the assessable income/net income of the trust for the relevant year and accordingly taxed to the trustee, and ultimately the beneficiary, unless they were disregarded for some reason by Division 855.
Moreover, the Full Federal Court held that these capital gains could not be disregarded under s855-10. They were not disregarded for each trustee because the trustee was not a foreign resident or the trustee of a foreign trust, and the trustee was not assessed on a 'capital gain' but rather an 'amount' equal to such a gain.9 They were not disregarded for each beneficiary because although Subdivision 115-C deems a foreign resident beneficiary to have made a capital gain, it does not deem such a beneficiary to have made the capital gain 'from a CGT event' within the meaning of s855-10. Furthermore, the fact that s855-40 only disregards deemed capital gains for foreign resident beneficiaries of fixed trusts implies that s855-10 does not operate to disregard such gains for such beneficiaries of non-fixed trusts.10 Here, neither trust was a fixed trust.
In reasons that were not considered further by the Full Federal Court, Justice Thawley at first instance also noted that the beneficiary who had been distributed shares in specie additionally made an actual (non-deemed) capital gain as a result of the distribution, but this was disregarded by s855-10, as the beneficiary was a foreign resident and the capital gain was from CGT event E5 happening to non-taxable Australian property that he owned directly (namely, his interest in the trust).11
The trustees have sought special leave to appeal to the High Court.
TD 2017/23 confirmed to be correct; TD 2017/24 implied to be correct
In summarising the interaction between Subdivision 115-C and Division 855, the Full Federal Court effectively confirmed the Commissioner's reasoning in TD 2017/23 by holding that 's855-10 applies to a foreign trust that has made a gain from non-taxable Australian property in computing whether it has a net capital gain for inclusion in its assessable income'.12 Put simply, capital gains or losses made by foreign resident trusts on non-taxable Australian property are disregarded and not subject to CGT under Subdivision 115-C, either in the hands of the trustee or beneficiaries. In contrast, capital gains or losses made by foreign resident trusts on taxable Australian property are subject to CGT.
However, the court's conclusion that s855-10 does not apply to a capital gain made by the trustee of a resident trust estate appears to confirm the Commissioner's reasoning in TD 2017/24 that s99B taxes an Australian resident beneficiary on distributions of the proceeds of capital gains from a foreign resident trust.13 Moreover, the court's emphasis that only Subdivision 115-C allows Australian resident beneficiaries to offset capital losses against, and apply the CGT discount to, capital gains distributed to them from trusts, which can only operate in the context of Australian resident trusts or taxable Australian property, implies that the Commissioner is also correct to rule in TD 2017/24 that capital losses and the CGT discount cannot reduce the tax payable under s99B on capital gain distributions from foreign resident trusts.14
TD 2019/D6 and TD 2019/D7 largely confirmed to be correct
The Full Federal Court's reasons in Greensill endorse the position adopted by the Commissioner in TD 2019/D6 that a foreign resident beneficiary of a discretionary trust cannot rely on Division 855 to disregard any capital gain they are deemed to have made because of Subdivision 115-C. Consequently, the Commissioner is likely to finalise TD 2019/D6, potentially with references to Greensill, subject to the outcome of any appeal. Interestingly, both TD 2019/D6 and TD 2019/D7 expressly do not deal with the implications of Australia's double tax agreements, and no argument in relation to the applicable Australia-United Kingdom agreement was considered in Greensill, where the relevant beneficiary was a resident of the United Kingdom, so that issue remains open.
The Full Federal Court's reasons in Greensill also effectively endorse the position adopted by the Commissioner in TD 2019/D7 that trust capital gains are assessable to foreign resident beneficiaries and Australian resident trustees regardless of source. The court emphasised that capital gains are taxed to beneficiaries and, effectively, trustees through Subdivision 115-C, which has no concept of source, rather than the general trust taxation rules in Division 6 and the general rule regarding the assessable income of foreign residents contained in s6-10, which do.15 Consequently, the Commissioner is also likely to finalise TD 2019/D7, again potentially with references to Greensill, again subject to the outcome of any appeal.
However, there is one significant part of TD 2019/D7 that the reasoning of the Full Federal Court did not specifically address. In TD 2019/D7, the Commissioner had adopted the position that a foreign resident beneficiary could potentially apply under s99D of the ITAA 1936 for a refund of any tax paid by an Australian resident trustee on foreign-sourced income, including any capital gain. The Full Federal Court's insistence that capital gains have been removed from the assessing provisions of Division 6,16 which contains s99D, appears inconsistent with that position. Even if s99D is characterised as a refund provision rather than an assessing provision,17 and so could still operate to provide refunds of tax on capital gains, it would be an odd outcome for capital gains to be taxed regardless of source, but for refunds only to be allowed for foreign-sourced gains.
Policy considerations and the potential for legislative reform by Parliament
Overall, this leads to the arguably anomalous outcome that foreign resident beneficiaries are subject to Australian tax on capital gains from non-taxable Australian property distributed to them from Australian resident trusts, despite being effectively exempt from Australian tax on other trust income from foreign sources courtesy of the s99D refund provision. And if capital gains from non-taxable Australian property are distributed from a foreign resident trust to a foreign resident beneficiary, the foreign resident beneficiary is not subject to Australian tax at all.
In contrast, trust capital gains distributed to an Australian resident beneficiary from an Australian resident trust are subject to concessional CGT treatment in the hands of that beneficiary, while those related to non-taxable Australian property from a foreign resident trust are taxed without any such concessions.
Underlying all of the taxpayers' arguments in Greensill was a policy proposition that foreign residents should not be taxed on capital gains that have no real nexus with Australia because they arise on the disposal of non-taxable Australian property. The Full Federal Court agreed with Justice Thawley at first instance, who addressed this policy argument head on and rejected it:18
'Much of the applicant's argument proceeded upon an assumption that there existed a policy objective of not taxing foreign beneficiaries of resident trusts in respect of CGT events in relation to CGT assets which were not taxable Australian property. The applicant's process of construction then analysed the statutory provisions through this lens. This approach falls foul of the caution expressed in Certain Lloyd's Underwriters v Cross (2012) 248 CLR 378 at  that a danger to be avoided in construing a statute is making an a priori assumption about a statute's purpose and construing the statue to coincide with the assumption. The correct process is the inverse: the purpose is to be derived from what the legislation says, not from an assumption about the desired or desirable operation of the provisions.'
Read together, the provisions of Subdivision 115-C and Division 855 evinced an intention only to disregard deemed capital gains arising upon the disposal of non-taxable Australian property made by foreign resident beneficiaries through fixed trusts. While it was obvious that if the taxpayers had owned the shares directly, any capital gain they made on their disposal would have been disregarded, the Parliament had decided 'for integrity reasons' that they should have the same treatment only if they owned the shares indirectly through a fixed trust and not indirectly through a discretionary trust.19
It is far from clear what 'integrity reason' is served by taxing foreign resident beneficiaries of fixed trusts on the same basis as foreign resident direct owners, but taxing foreign resident beneficiaries of non-fixed trusts on the same basis as Australian resident beneficiaries or direct owners. Justice Thawley noted that 'different views might be held as to whether that is an appropriate outcome. Those are issues for the legislature, not the court.'20 Justice Steward noted that extending the same treatment for fixed trusts to discretionary trusts 'would, one might think, be likely to enhance "Australia's status as an attractive place for business and investment", which is one of the "objects" of Div. 855'.21
Given the current economic climate and recent history of tax 'reform' measures, it seems unlikely that the Parliament would be tempted to enact amending legislation that would effectively exempt foreign resident beneficiaries of Australian resident discretionary trusts (in many cases, likely to be high net worth individual beneficiaries of family trusts) from Australian tax on capital gains from non-taxable Australian property distributed to them. Whether the Parliament would be tempted to extend concessional CGT treatment to capital gains from non-taxable Australian property distributed from a foreign resident trust to an Australian resident beneficiary, effectively extending concessional CGT treatment upon such gains, may be another matter.
What now for foreign resident beneficiaries of Australian resident trusts?
Subject to any appeal, assuming that the Parliament declines to amend the law in favour of foreign resident beneficiaries of Australian resident non-fixed trusts, such as discretionary trusts, the position will remain that capital gains made on the disposal of such trust property will be taxed either to the trustee or beneficiaries, regardless of whether the property is taxable Australian property and regardless of whether the beneficiaries are foreign residents. This cannot be avoided by the trust becoming a foreign resident, as that may trigger taxable capital gains on all of its non-taxable Australian property and some of its taxable Australian property.22
Of course, foreign investment also is made into Australia through other trusts, such as AMITs, meaning that many foreign resident beneficiaries of Australian resident trusts will be foreign resident members of AMITs. AMITs are deemed to be a fixed trust, and members of AMITs are deemed to have made any capital gains attributed to them by the AMIT in their own right for the purposes of determining whether they are taxed on such capital gains.23 This should mean that foreign resident members of AMITs are not taxed on capital gains arising from the disposal by the AMIT of non-taxable Australian property.24 In short, the implications of Greensill should be simply irrelevant to them.
Even for Australian resident trusts that are not AMITs, foreign resident beneficiaries of Australian resident fixed trusts should not be taxed on deemed capital gains under Subdivision 115-C arising from the disposal by the trust of non-taxable Australian property under s855-40. Importantly, the definition of a fixed trust is very strict, and requires that beneficiaries hold fixed entitlements, meaning vested and indefeasible interests, to all income and capital of the trust.25 Even in the case of unit trusts, the trustee or unit holders may have certain discretions or powers that render the interests of the unit holders contingent or defeasible.26
For this reason, the Commissioner does have a discretion to effectively deem a trust that would not otherwise satisfy the strict definition to be a fixed trust, having regard to the circumstances in which the entitlement is capable of not vesting or the defeasance can happen, the likelihood of the entitlement not vesting or the defeasance happening, and the nature of the trust. To this end, the Commissioner has issued an administrative safe harbour compliance approach that effectively deems the discretion to have been exercised for the following categories of trust (subject to the satisfaction of detailed requirements):27
- listed trusts;
- registered managed investment schemes that are trusts;
- certain widely held trusts that satisfy licensing requirements;
- unregistered managed investment schemes that satisfy licensing requirements;
- specific single interest holder trusts; and
- other non-discretionary trusts.
Clearly, many discretionary trusts will never satisfy the strict definition of a fixed trust or even the administrative safe harbour compliance approach. For foreign resident beneficiaries of other trusts, it will be imperative to ensure that the trust either satisfies the strict definition of a fixed trust, qualifies for the administrative safe harbour compliance approach, or has been successful in having the Commissioner actually exercise the discretion to deem the trust to be a fixed trust. Otherwise, the foreign resident beneficiaries and trustees will be subject to Australian tax on all trust capital gains.
If the Commissioner will not exercise the discretion, then the trust terms could be amended such that they are made more consistent with the trust being a fixed trust. However, if such an amendment is not made under a valid exercise of a power contained within the constituent document of the trust or with the approval of a relevant court, or, even if it is, the amendment causes the existing trust to terminate, a particular asset to be settled on the terms of a different trust or a trust split to occur, that may trigger taxable capital gains on all or some of the trust property.28
Australian Taxation Office, Income tax: does the residency assumption in subsection 95(1) of the Income Tax Assessment Act 1936 (ITAA 1936) apply for the purpose of section 855-10 of the Income Tax Assessment Act 1997 (ITAA 1997), which disregards certain capital gains of a trust which is a foreign trust for CGT purposes? TD 2017/23, 13 December 2017; Australian Taxation Office, Income tax: where an amount included in a beneficiary's assessable income under subsection 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936) had its origins in a capital gain from non-taxable Australian property of a foreign trust, can the beneficiary offset capital losses or a carry-forward net capital loss ('capital loss offset') or access the CGT discount in relation to the amount? TD 2017/24, 13 December 2017.
Income Tax Assessment Act 1936 (Cth) s99B.
Australian Taxation Office, Income tax: does Subdivision 855-A (or subsection 768-915(1)) of the Income Tax Assessment Act 1997 disregard a capital gain that a foreign resident (or temporary resident) beneficiary of a resident non-fixed trust makes because of subsection 115-215(3)? TD 2019/D6, 30 August 2019; Australian Taxation Office, Income tax: is the source concept in Division 6 of Part III of the Income Tax Assessment Act 1936 relevant in determining whether a non-resident beneficiary of a resident trust (or trustee for them) is assessed on an amount of trust capital gain arising under Subdivision 115-C of the Income Tax Assessment Act 1997? TD 2019/D7, 30 August 2019.
 FCAFC 99 (10 June 2021).
Income Tax Assessment Act 1997 (Cth) s104-10.
Income Tax Assessment Act 1997 (Cth) s104-75.
Peter Greensill Family Co Pty Ltd v Commissioner of Taxation  FCA 559 (28 April 2020). Interestingly, almost immediately after Justice Thawley published his reasons, the trustee took the unusual step of applying to request he reconsider them, on the basis that he overlooked material matters, which were essentially the same submissions that the trustee had already advanced. Justice Thawley rejected that application ex tempore, on the basis that final orders in the matter had already been entered, there were no grounds for amending those orders as no material matters had been overlooked in the first proceeding, and the proper course of action for the still aggrieved trustee was to appeal to the Full Federal Court: Peter Greensill Family Co Pty Ltd v Commissioner of Taxation (No 2)  FCA 597 (5 May 2020) -.
N & M Martin Holdings Pty Ltd v Commissioner of Taxation  FCA 1186 (18 August 2020).
 FCAFC 99 (10 June 2021) -.
 FCAFC 99 (10 June 2021) , , -.
 FCA 559 (28 April 2020) . While it is not clear from the facts, if the beneficiary had acquired his interest in the trust otherwise than by way of expenditure or assignment, which is common for family discretionary trusts, then any capital gain would also have been disregarded under the terms of CGT event E5 itself: s104-75(6)(a).
 FCAFC 99 (10 June 2021) , -.
 FCAFC 99 (10 June 2021) .
 FCAFC 99 (10 June 2021) -, .
 FCAFC 99 (10 June 2021) , .
 FCAFC 99 (10 June 2021) -.
See Income Tax Assessment Act 1936 (Cth) ss95AAB, 95AAC, 102UX;  FCAFC 99 (10 June 2021) .
 FCA 559 (28 April 2020) ;  FCAFC 99 (10 June 2021) .
 FCA 559 (28 April 2020) , ;  FCA 597 (5 May 2020) ;  FCAFC 99 (10 June 2021) -.
 FCA 597 (5 May 2020) .
 FCA 1186 (18 August 2020) .
Income Tax Assessment Act 1997 (Cth) s104-170.
Income Tax Assessment Act 1997 (Cth) ss276-55, 276-80, 276-95.
See also Income Tax Assessment Act 1997 (Cth) ss 276-80, 276-105, which appear to restrict tax on foreign resident beneficiary members to amounts with an Australian source.
Income Tax Assessment Act 1997 (Cth) s995-1(1)(definitions of 'fixed entitlement' and 'fixed trust'); Income Tax Assessment Act 1936 (Cth) sch2F s272-5(1).
See eg MSP Nominees Pty Ltd v Commissioner of Stamps (SA) (1999) 198 CLR 494, 509; Colonial First State Investments Ltd v Commissioner of Taxation (2011) 192 FCR 298, 321-4 (Justice Stone).
Australian Taxation Office, Fixed entitlements and fixed trusts, PCG 2016/16, 13 September 2017, -, Attachment B.
Australian Taxation Office, Income tax: does CGT event E1 or E2 in sections 104-55 or 104-60 of the Income Tax Assessment Act 1997 happen if the terms of the trust are changed pursuant to a valid exercise of a power contained within the trust's constituent document, or varied with the approval of a relevant court? TD 2021/21, 24 October 2012; Australian Taxation Office, Income tax: will a trust split arrangement of the type described in this Determination cause a new trust to be settled over some but not all assets of the original trust with the result that CGT event E1 in subsection 104-55(1) of the Income Tax Assessment Act 1997 happens? TD 2019/14, 13 December 2019. It might also result in CGT event E3 happening: Income Tax Assessment Act 1997 (Cth) s104-65.