Should I Hold Shares In A Trust As A Non-Resident? – where and how a Australian expat who is a non-resident for tax purposes should hold their shares is a commonly asked question in the expat community.
In this article we run through some of the considersations that take into account the recent ATO Tax Determinations that were made about this exact topic.
Australian Discretionary (Family) Trusts
The Australian Tax Office (ATO) has recently published two (2) significant Tax Determinations (TD) in TD 2022/12 and 2022/13 which relate to Capital Gains distributed by Australian Trusts.
The Public Rulings reflect the ATO’s view on applying tax law when a non-resident beneficiary of an Australian resident Trust becomes presently entitled to a capital gain from the sale of Non-Taxable Australian Property (non-TAP), for example direct shares, managed funds, or Exchange-traded funds.
TD 2022/12 provides that a non-resident beneficiary of a resident non-fixed trust is assessable on an amount of trust capital gain, irrespective of whether the gain has a source in Australia.
TD 2022/13 provides that Division 855 of ITAA 1997 does not enable a non-resident beneficiary of a resident non-fixed trust to disregard their share of a non-TAP trust capital gain.
The recent tax determinations align with the decision made by the Federal Court of Australia on a Case between Trustees of an Australian Family Trust and the Commissioner of Taxation (Greensill) in June 2021.
In Greensill, the Federal Court concluded that a non-resident beneficiary of an Australian resident non-fixed trust is assessable on their share of a capital gain of the trust, regardless of whether the gain relates to assets that are not TAP.
Why does this matter for Australian expats?
The public rulings suggest that where TAP assets such as shares are held through a non-fixed trust structure, such as a Family Trust, the capital gains implications could be far more punitive than if they were held directly as an individual or held jointly.
This may warrant Australian expats to reconsider the structure in which they hold their non-TAP assets.
Subsection 855-10(1) of the ITAA 1997 provides that a foreign resident can disregard a capital gain or capital loss from a CGT event if the event happens in relation to a CGT asset that is not TAP.
However, the recent tax determinations suggest that Non-Tap assets are not CGT exempt when the capital gain is distributed through an Australian trust to a non-resident beneficiary.
Considerations For Non-Resident Australians Who Own Shares
The type of trust is crucial to determine whether the beneficiary is entitled to the benefit of the exception in section 855-10(1) to exclude tax on capital gains from non-TAP assets.
A non-resident beneficiary entitled to gains from a “fixed trust” may rely on the exception.
Managed Funds and Exchange-Traded Funds broadly have a deemed fixed trust status due to most being unit trusts.
Non-resident beneficiaries of non-fixed trusts cannot access the capital gains tax (CGT) exemption under section 855-10 of the ITAA 1997 Act because the amount on which a foreign resident beneficiary is taxed is not a capital gain from a CGT event of the beneficiary, as required by the terms of the exemption.
Instead, it is an amount calculated by reference to a capital gain arising from a CGT event that occurs in relation to a trust asset.
Australian expats should speak to their Financial Adviser who is a specialist in expat matters to determine the implications of the recent changes.