Temporary Residents – CGT Trust Trap!

Australia’s tax rules provide generous concessions and exemptions for individuals who are classed as a ‘temporary resident’ for income tax purposes.
A ‘temporary resident’ is defined as a person:

  1. who holds a temporary visa granted under the Migration Act 1958;
  2. who is not an ‘Australian resident’ for the purposes of the Social Security Act 1991; and
  3. whose spouse is not an Australian resident within the meaning of the Social Security Act 1991.

In general, foreign-source income derived by a temporary resident will be exempt from income tax in Australia.

However, this exemption does not apply to:

remuneration for employment undertaken or services provided while a person is a temporary resident. The reason for this exception is the government’s view that permanent and temporary residents should compete on a level playing field for the supply of labour or services overseas, andalienated personal services income assessable under Division 86 of the Income Tax Assessment Act 1997 (‘ITAA 1997’).

Capital gains and losses made by a temporary resident will be treated as if they had been made by a non-resident – refer section 768-915 ITAA 1997. In addition, special rules apply where there is a change of residence status. These concessions reflect the policy of treating a temporary resident as if they were a non-resident for CGT purposes. This essentially means temporary residents only have a CGT exposure for CGT assets that constitute taxable Australian property.

Given the above, and by way of example, if a New Zealand couple move to Australia and qualify as temporary residents, any sale by them of property held in New Zealand will fall outside the Australian CGT net.
However, if we assume the New Zealand property is held in a discretionary trust that is a resident of Australia for income tax purposes, will a net capital gain distributed from the trust to the New Zealand couple as beneficiaries qualify for exemption on the basis the beneficiaries are temporary residents?

The answer is no!

Section 768-915 of the ITAA 1997 essentially exempts an individual who is a temporary resident from Australian CGT where the asset sold is not TAP. The section does not operate on a ‘look through’ basis – that is, the CGT event must be made by the individual themselves. We note that a specific exemption applies for capital gains flowing through fixed trusts to non-residents/temporary residents but where the trust is a discretionary trust, this exemption cannot apply.

It seems this issue has been identified as an unintended consequence of the law and it is listed on the list of current ‘Tax Issues Entry System’ as an issue that needs to be resolved. It’s not known if, or when a legislative ‘fix’ may occur.

Further, to the extent the trust is able to apply the general 50% CGT discount, this will be reversed if the gain is ultimately distributed to temporary resident beneficiaries as access to the general CGT discount was removed for non-residents and non-resident trust beneficiaries (including temporary residents) from May 2012.

This article provides a general summary of the subject covered as at the date it is published. It cannot be relied upon in relation to any specific instance. Webb Martin Consulting Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.

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