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Adam Crowley was featured in the latest issue of the Taxation in Australia Journal for his article on "Discretionary trusts, non-TAP gains, and foreign beneficiaries".
INTRODUCTION
The foundations of a sound tax system are built on the notions of efficiency, equity and simplicity.[1] Put simply, this means that the tax system should minimise distortion, apply fairly, and be clear and concise in its application.[2]
While determining “fairness” may be subjective, in the context of the Australian tax system, it is generally accepted that “fairness” occurs when individuals in similar circumstances are taxed similarly.[2] It seems to therefore follow that it would also be “unfair” to impose the same scope of taxation on those in different circumstances.
For this reason (in part), the Australian tax system differentiates between residents and non-residents. In the context of fairness, those who contribute to the system should also benefit from the system. As non-residents are typically unable to benefit from government spending in the same way as residents,[3] it is only fair that these individuals are not subject to the same scope of taxation as those who reside in Australia.
With this in mind, and a desire to encourage investment in Australia and better align with OECD standards,[4] the parliament repealed former Div 136 of the Income Tax Assessment Act 1997 (Cth) (ITAA97) and introduced Div 855 ITAA97. The effect of Div 855 is relatively simple. It seeks to narrow the range of assets that are subject to Australian capital gains tax for foreign residents.[4]
While the Division seemingly achieves its desired effect for CGT assets held directly, or indirectly via fixed trusts, it falls apart where discretionary trusts are concerned.
The discussion that follows considers the notion of fairness when applying Div 855 in the context of discretionary trusts. To this end, first, it outlines the form of the relevant provisions and their interaction. Second, it considers the applicable case law, recent ATO determinations, and critiques from the profession. Finally, it seeks to demonstrate that what otherwise appears unfair is, in effect, necessary to protect the integrity of the Australian tax system.
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Adam Crowley is a Director of Business Advisory Services, Partner of RSM Australia and the National Leader of Property and Construction. Adam has over 15 years of experience in accounting, taxation and business advisory, specialising in all areas of the property and construction industries. Adam provides accounting, business advisory, tax consulting and compliance services to his clients, both locally and internationally. View Adam's profile
References
[1] H Hodgson, “Theories of distributive justice: frameworks for equity”, (2010) 5(1) Journal of Australasian Tax Teachers Association 86-116.
[2] M Dirkis, Terms of engagement: a qualitative examination of the basic building blocks of Australia’s international tax regime (residency and source) against the tax policy objectives of equity, efficiency, simplicity and the prevention of tax avoidance and an exploration of the avenues for reform, thesis, 2004.
[3] Either through their lesser use of public facilities and infrastructure (as they live and reside elsewhere), or their exclusion from the social security system (typically being ineligible for Medicare, Centrelink etc).
[4] Page 32 of the explanatory memorandum to the Tax Laws Amendment (2006 Measures No. 4) Bill 2006.
This article was originally published in Taxation in Australia • Vol 54 (11) • June 2020