Trustees beware – distributions of capital gains to non-resident beneficiaries held to be taxable in the Greensill decision

Trustees of discretionary trusts and many unit trusts that distribute capital gains to non-resident beneficiaries will need to include these capital gains in their assessable income.

This was the conclusion reached by the Federal Court in Peter Greensill Family Co Pty Ltd (as trustee) v Federal Commissioner of Taxation [2020] FCA 559.

What happened in Greensill?

The issue in Greensill was whether the trustee was entitled to disregard its capital gains when it made a foreign resident beneficiary specifically entitled to those gains.

The capital gains tax event occurred in relation to shares that were not taxable Australian property.

Under section 855-10 of the Income Tax Assessment Act 1997, foreign residents are entitled to disregard any capital gain or loss from a CGT event that happens in relation to a CGT asset that is not taxable Australian property.

In Greensill, Thawley J found that section 855-10 did not apply when foreign beneficiaries were specifically entitled to capital gains from an Australian resident trust. Therefore, the trustee was required to pay tax on the capital gain.

Thawley J found that:

• it was the trustee that made the capital gain
• the trustee was not a foreign resident, so section 855-10 did not apply to the trustee
• section 855-10 also did not apply to the foreign resident beneficiary as the distribution was not a capital gain ‘from’ a CGT event, but a distribution of ‘amount’ equal to the capital gain made by the trustee.

Distribution resolutions for the 2020 income year

In deciding how to make distributions of capital gains for this income year, trustees should consider the tax consequences of distributing capital gains to non-resident beneficiaries.

Please contact a member of the team if you would like to discuss this issue further.