Speaking at the Tax Institute’s NSW annual tax forum, Brown Wright Stein Lawyers partner, Andrew Noolan, said the introduction of streaming provisions in the Tax Laws Amendment (2011 Measures No 5) Act 2011 have created some unintended consequences when considering CGT on non-taxable Australian property (TAP) assets.
“When a trustee of an Australian resident trust makes a gain on a CGT asset and appoints the gain to a foreign resident, they have a capital gain to be reported in Australia regardless of where the asset was located or whether the gain was Australian or foreign sourced,” said Mr Noolan.
“Practically, you don't want to distribute capital gain to a foreign resident and tell them this is not taxable when it is.
“When these measures got introduced into parliament, the Treasurer at the time said if there were anomalies in the legislation they would be fixed. I think this is an anomaly and hasn't been fixed.”
Mr Noolan further explained that under section 855-40 of the ITAA 1997, while there is a specific exemption for a beneficiary of a fixed trust from recognising gains on property that are not TAP, the streaming changes have resulted in a foreign resident being subject to a much broader exemption.
“An issue with such an interpretation, however, is that it would exempt from taxation Australian-sourced capital gains on non-TAP assets distributed to non-residents, that were taxable to foreign residents prior to the streaming measures being introduced,” said Mr Noolan.
“There is a provision there in section 855-10 that says if you are a foreign resident or trustee of a foreign trust just before a CGT event happens and the CGT that happens in relation to the CGT asset is not a taxable Australian property, you can disregard a capital gain or loss .
“I've had arguments with tax officers about this and whether this provision can apply because there is a direct provision in section 855-40 that says if you receive a capital gain through a fixed trust and you are a beneficiary, then you can disregard the capital gain that is going to arise if the capital gain arises in relation to something that is not taxable Australian property,” he added.
“But 855-10, if read in a charitable way, could be read to get foreign residents out of being taxed in this situation and this is why I think the commissioner should use his remedial powers [to fix the law].”
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Jotham Lian is the editor of Accountants Daily, the leading source of breaking news, analysis and insight for Australian accounting professionals.
Before joining the team in 2017, Jotham wrote for a range of national mastheads including the Sydney Morning Herald, and Channel NewsAsia.