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It is quite common for a unit trust to make non-assessable distributions to unit holders. This is because income distributed by the unit trust is not assessable to the trustee but rather is assessable in the hands of the unit holder. A distribution by a trustee of the amount of capital gain that is excluded from the net income of the trust because the trustee claimed the CGT discount or the small business 50 per cent reduction may be a non-assessable amount.
If a profit made by the unit trust is not assessable, any part of that profit distributed to an individual unit holder will also be non-assessable in most cases for example, a share of a profit made on the sale of property acquired by the unit trust before 20 September 1985.
If you receive non-assessable distributions from a unit trust, you need to make annual cost base adjustments while you own the units. If the sum of the amounts of the non-assessable distributions you get during the income year is not more than the cost base of the units at the end of the income year, the cost base and reduced cost base of the units are reduced by that sum.
Before you reduce the cost base of the units, you must exclude any parts of the non-assessable distributions that represent certain deductions and exempted amounts allowed to the trust - for example, for building depreciation. This is normally referred to as the tax-free amount on distribution statements unit holders receive. However, this rule does not apply to any tax-free amounts received before 18 December 1986.
You make a capital gain if the sum of the amounts of the non-assessable distributions you get during the income year, excluding any tax-free amounts, is more than the cost base of the units at the end of that income year. The amount of the capital gain is equal to the excess. If you make a capital gain, the cost base and reduced cost base of the units are reduced to nil. You cannot make a capital loss.
When you sell the units, you must first adjust the cost base or reduced cost base of the units at the time of sale, based on the amount of non-assessable distributions you received during the income year. These calculations are explained in the previous paragraphs. You then compare the capital proceeds from the sale of the units with the adjusted cost base or reduced cost base of the units at the time of sale to calculate the capital gain or capital loss. This is explained in the following example.
Non-assessable distribution if the CGT discount is claimed by the trust
The ABC Unit Trust disposes of an asset in October 1999 and makes a capital gain of $1,000. In calculating the net capital gain of the trust, the trustee claims the 50 per cent CGT discount, leaving a net capital gain of $500 (the trust has no capital losses) . Bob is the sole beneficiary of the trust and the cost base of his units in the trust is $2,000.
The trustee distributes $1,000 to the sole beneficiary, Bob. Bob has received a non-assessable distribution of $500 and an assessable distribution of $500.
In calculating the net capital gain for the year, Bob must 'gross up' the capital gain from the trust to $1,000. He may then apply the 50 per cent CGT discount, leaving a net capital gain of $500.
The cost base of Bob's units, reduced by the amount of the non-assessable distribution, becomes $1,500.
The adjustment to the cost base of the units is affected if you have applied capital losses or prior year capital losses against the grossed up trust capital gain.
In the example above, Bob had capital losses of $400 which he applied against the $1,000 capital gain before applying the 50 per cent CGT discount.
$200 of the non-assessable distribution has effectively been offset against capital losses. Therefore, Bob only reduces the cost base of his units by $300 to $1,700.
Future capital gain on the sale of units
Bob sold the units in ABC Trust for $2,500 on 30 November 2000. His capital gain, if he claims the CGT discount, will be calculated as follows:
less cost base
The net capital gain (assuming no other capital gains or losses) to be included in Bob's assessable income = $400
Last modified: 18 Sep 2009QC 18323