Discretionary trust becoming a non-resident

A discretionary trust that I am trustee of, which was set up in Australia, may soon become a non-resident (according to Residency requirements for companies and trusts). It's unclear to me what the consequences of this are (would love pointers to resources/recommendations of professionals who have dealt with this before).

My guess is that, upon becoming a non-resident, all assets will be deemed to have been sold, and capital gains will be payable on them. What happens after that? (Assume that the trust will not become a resident of any other country which seems possible to me since it doesn't meet the residency tests for any other country). Can the trust then keep income each year without distributing it (assuming the trust deed allows this) without paying tax to any country (of course there may still be witholding, e.g. 10% for interest earned in Australia, nothing for fully franked dividends etc)?

What happens if the trust becomes a resident of Australia at some point in the future. Does the cost basis of all assets at that point reset?

Seems like a trust being able to accumulate wealth without having to file tax returns is too good to be true.

Is there any reason why it would be better to ensure the trust stays a resident?

Many thanks for any advice.

 

Hi Naz,

I have never considered this before or looked into it.

A quick check shows Division 6AAA ITAA 1936
INCOME TAX ASSESSMENT ACT 1936

CGT event I2 happens if a trust stops being a resident trust for CGT purposes, s 104.170 ITAA 1997
INCOME TAX ASSESSMENT ACT 1997 - SECT 104.170 Trust stops being a resident trust: CGT event I2

 

And,

the definition of a (non) resident trust for CGT purposes is at s995.1 ITAA 1997
INCOME TAX ASSESSMENT ACT 1997 - SECT 995.1 Definitions [see Notes 2 and 3]

 

Given the following scenario:

Homer is the sole Trustee of the Simpons Discretionary Trust with himself and Marge as beneficiaries.
During the financial year ‘24, Homer’s tax residency changed when he accepted a new role by the Globex Corporation and moved (with Marge) overseas (in May’24) for the foreseeable future.

Do I understand correctly, that:
1. Simpsons Discretionary Trust will be considered “Resident” for the full financial year ’24 (even though the trustee is non-resident for partial of the year)
2. CGT I2 happens 1 July 2024?
3. CGT I2 triggers a “Deemed Disposal” with no CGT discount? (given both Homer and Marge will be non-resident)
4. The capital gains are distributed in financial year ‘25

 

Depends on what assets the trustee holds but generally yes

 

Thanks Terry. The Trust has invested in non-TAP only.
The main point I wanted to clarify is that CGT I2 will occur on 1 July 2024, ie FY25, as opposed to CGT I1 which will occur in May'24 upon the departure of the Simpsons duo.

 

It can also be wise to dispose of such assets prior to the residency trigger

 

That is something the trustee should take tax advice on. Not enough info