This news service has published a series of articles by law firm Baker McKenzie examining new developments in tax, compliance and matters affecting private clients in the Asia-Pacific region. The latest is about Australia.

This is the latest in a series of briefings by international law firm Baker McKenzie about private client and associated matters affecting high net worth individuals and business owners in the Asia-Pacific region. This article covers Australia, and is written by Monique Ross, senior associate in the Baker McKenzie's tax group in Australia, and Sidney Yiu, associate at the same group. 

The editors are pleased to share this content and invite readers who are interested to respond. The usual disclaimers apply to contributions from outside sources. Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

1. Tax avoidance taskforce expanded
In December 2019, the Australian Taxation Office ("ATO") announced a dramatic expansion of its tax avoidance task force and tax performance programmes for private groups.

The ATO has widened reviews of the top 320 largest private wealth groups to the top 500, and is focusing new attention on reviewing the business affairs of "emerging" wealth businesses, individuals and trusts. The ATO is also deploying dedicated audit and assurance resources to private groups controlling wealth exceeding A$5 million, and private businesses with revenue exceeding A$10 million.

The ATO has asserted that, by the year 2024, Australia's entire high net worth population will face additional and detailed examination.

Since the introduction of the tax avoidance taskforce in July 2016, an additional A$14 billion in tax liabilities have been raised with A$8.2 billion coming from large groups, companies and wealthy individuals.

2. Privilege issues around data leaks
The recent High Court case in Glencore International AG v Commissioner of Taxation confirmed that the ATO may use information obtained from data leaks, even if the information was leaked from a law firm and was subject to legal professional privilege ("LPP").

The High Court emphasized that LPP is a shield, not a sword, and does not provide a positive right to claim a remedy. Once the information is released, it is considered in the public domain and may be used by the ATO. The decision ensured that the ATO will continue to be able to use information in its possession and can make tax decisions such as issuing a notice of assessment to a taxpayer.

Notably, this case does not weaken the principles behind LPP but rather affirms the importance of confidentiality as a component of LPP. Taxpayers should be wary of potential technology breaches and data security in the management of their tax affairs.

3. Foreign residents and main residence exemption
On 12 December 2019, the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Act 2019 was enacted ("2019 Act") to remove the capital gains tax ("CGT") exemption for the sale of a main residence by foreign residents. A similar bill was introduced in 2018 to effect the same changes but lapsed.

The Australian main residence exemption provides an exemption from CGT where an individual makes a gain from the sale of property, which is their main residence throughout their ownership period. A partial exemption is also available if it was the individual's main residence for a part of the ownership period. A property also maintains its CGT exemption status where an individual vacates it as their main residence but they make no other main residence election.

The 2019 Act is designed to prevent an individual from using the exemption if they are foreign residents at the time they sell the property. For properties held before 7:30 pm (AEST) on 9 May 2017, the exemption will only be able to be claimed for disposals that happened up until 30 June 2020, provided the other existing requirements are met.

If these properties are disposed of after 30 June 2020, the foreign taxpayer will no longer be entitled to the exemption unless one of the following specific (and limited) life events applies during the period where that individual has been a foreign resident for six years or less:

•    Either the foreign resident, their spouse, or their child who was under 18 years of age, has a terminal medical condition;
•    Their spouse, or their child who was under 18 years at the time of their death, dies; or
•    The transfer of the property is part of a distribution of assets between the foreign resident and their spouse because of their divorce, separation or similar maintenance arrangements.

For properties acquired at or after 7:30 pm, 9 May 2017, the exemption will no longer apply to disposals from that date unless the above life events occur within the continuous six-year period.

If the foreign resident dies, the changes also apply to legal personal representatives, trustees and beneficiaries of deceased estates, surviving joint tenants and special disability trusts.

4. Capital gains tax on trustees distributing capital gains to non-residents
The recent Federal Court decision in Peter Greensill Family Co Pty Ltd (trustee) v Commissioner of Taxation ("Greensill") supports the imposition of CGT on trustees distributing capital gains to non-residents, even where the gains related to assets that were not taxable Australia property ("TAP"). The decision confirms the ATO's recent draft Taxation Determination TD 2019/D6 and has major implications for non-resident beneficiaries of Australian discretionary trusts.

Facts: The trustee of an Australian discretionary family trust ("PGFC") made capital gains on the sale of shares which were not TAP over several income years. PGFC distributed 100 per cent of the capital gains to Mr Greensill, who was a foreign resident and beneficiary under the discretionary trust. He argued that he was not liable for CGT.

Findings: The court considered the interaction of the following provisions:

•    taxation of trusts in Division 6 and Subdivision 6E of the ITAA 1936,
•    certain rules about trusts with net capital gains in Subdivision 115-C of the ITAA 1997; and
•    certain rules concerning the capital gains of foreign residents in Division 855 of the ITAA 1997.

Under Section 855-10, foreign residents are to disregard capital gains or losses from a CGT event if the CGT event happens in relation to a CGT asset that is not TAP. The court in Greensill found that this did not apply to disregard the capital gain made in this case as the word "from" required a direct connection between the capital gain and the CGT event. A capital gain which is received by a beneficiary because of a CGT event in relation to a CGT asset that is owned by a trust does not form the requisite nexus and is not "a capital gain from a CGT event". As a result, the beneficiary was liable for CGT on the capital gain on the sale of shares.

Had the capital gains been made by the beneficiary directly (i.e. if Mr Greensill had held the shares that were disposed of and made a gain), or through a fixed trust, Mr Greensill would have been exempt from taxation.

The key takeaways are:

•    CGT can be imposed on capital gains distributed to non-resident beneficiaries of Australian discretionary trusts even where the gains relate to assets that are not taxable Australian property.
•    The case dispels the notion that a beneficiary's tax position is to be determined as if they had been the one to make the capital gain. Had a non-resident beneficiary made the capital gain in their own right, no CGT would be applicable.
•    Individuals should carefully consider the use of discretionary trusts with non-resident beneficiaries in the context of asset management and estate planning due to the uncertainty raised by this case and TD 2019/D6.

5.    Dutiable declarations of trust over partnership interests
The recent High Court decision in Commissioner of State Revenue v Rojoda Pty Ltd ("Rojoda") confirmed that a partner's interest in partnership property during the partnership and on its dissolution but before winding up is different from a specific beneficial interest under a fixed trust.

Facts: In Rojoda, a partner that held freehold titles in land executed deeds to confirm that the partner held the land in proportion to each partner and legatees' respective shares. The partner then appointed Rojoda Pty Ltd as trustee of the land in place of the partner and transferred the land to Rojoda Pty Ltd.

Findings: The High Court held that the effect of the deeds and the partner's 'confirmations' amounted to dutiable declarations of trust over the land under the Duties Act 2008 (WA), thus triggering a stamp duty liability.

Subject to the terms of a partnership interest, partnership property must be held exclusively for the purposes of the partnership. Where the legal title is held by the partners, although there is some similarity between the partner's equitable rights over the property with that of a fixed trust, they are not the same. A partner's interest in a partnership constituted an equitable right to receive a proportion of the surplus after the realisation of the assets and payment of debt and liabilities under the partnership. However, before winding up is completed, no partner has any specific, fixed or ascertained equitable property interest in specific partnership assets. The deeds effectively extinguished the partner's equitable rights to the land under the partnership through the creation of new fixed trusts over the land.

The key takeaways are:
•    There is a clear distinction between partnership interests (before winding up) and interests under a fixed trust.
•    Taxpayers should be wary of making dealings over these partnership interests to avoid triggering stamp duty liability, even where the partnership interest seems comparable to a beneficial interest under a trust, given the ambit of the stamp duty provisions.
•    The courts will often look past labels that parties give to their arrangements to examine their legal substance. Merely asserting that no new trust is created is insufficient in these situations.

6. COVID-19 – impact of travel bans on individuals
Travel bans may be problematic for directors of non-resident companies currently based in Australia who need to travel to attend board meetings overseas. If the individual does not travel to attend these meetings, there may be a risk that the foreign entity may be considered resident in Australia and subject to Australian income tax under the "central management and control ("CMC")" residency test.

In response, the ATO has introduced foreign residency concessions for international businesses:

•    If the only reason for holding board meetings in Australia or directors attending board meetings in Australia is due to the impact of COVID-19, the ATO will not apply compliance resources to determine whether the taxpayer's CMC is in Australia.
•    Boards of foreign-incorporated companies that are not Australian tax residents may temporarily suspend their normal pattern and hold them in Australia instead. This will not, by itself in the absence of other changes in the company's circumstances, alter the company's residency status for Australian tax purposes.

In New South Wales, an individual is generally considered a foreign person, unless:

•    The individual is a foreign person;
•    The individual has lived in Australia for more than 200 days in the preceding 12-month period and is either an Australian permanent resident or holds particular classes of visas.

Due to the travel bans in most countries because of the COVID-19 pandemic, a permanent resident who has been stuck outside Australia and does not meet the 200-day threshold may be deemed as a foreign resident and may be liable to pay surcharge land tax on any NSW land they own.