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  • Capital gains made by a trust

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    Since 2011, in relation to capital gains, the general trust taxation provisions in Division 6 of the Income Tax Assessment Act 1936 (Division 6) give way to specific rules in Division 115-C of the Income Tax Assessment Act 1997. These rules ensure that, where permitted by the trust deed, the capital gains of a trust (other than an AMIT) can be effectively streamed to beneficiaries for tax purposes by making them 'specifically entitled' to those gains. Generally, a beneficiary will be considered specifically entitled to an amount of a capital gain if the beneficiary has received (or can reasonably be expected to receive) an amount referrable to that gain, and certain recording conditions are satisfied.

    A beneficiary specifically entitled to a capital gain will generally be assessed in respect of that gain, regardless of whether the benefit they receive or are expected to receive is income or capital of the trust.

    Capital gains to which no beneficiary is specifically entitled will be allocated proportionately to beneficiaries based on their present entitlement to income of the trust estate (excluding amounts of capital gains and franked distributions to which any entity is specifically entitled). This proportion is known as the beneficiary's 'adjusted Division 6 percentage'. If there is some income to which no beneficiary is entitled (apart from capital gains and/or franked distributions to which any entity is specifically entitled) the trustee may be assessed under section 99 or 99A of the ITAA 1936.

    The trust provisions also allow the trustee of a resident trust to choose to be assessed on a capital gain, provided no beneficiary has received or benefited from any amount relating to the gain during 2017–18 or within two months of 30 June 2018.

    From 2010–11, MITs had been able to choose whether to apply these rules. From 2017–18, however, this choice is no longer available.

    Item 13 on the tax return for individuals (supplementary section)

    Question 13 in the Tax return for individuals (supplementary section) 2018 tells you to exclude net capital gains from the amount of trust income you write at U item 13 on your tax return (supplementary section). In your statement of distribution or advice, the trust should state your share of the trust’s net capital gain. Exclude only so much of the trust's net capital gain that would otherwise form part of your share of the trust income.

    For beneficiaries of trusts

    Determine your share of the capital gain of the trust

    You will need to determine whether you have a share of each capital gain made by the trust that has been included in the trust's net income for tax purposes. For every capital gain you have a share of, your statement of distribution or advice from the trust should advise you of:

    • your share of that gain
    • how much of the net income of the trust for tax purposes relates to each gain (or what is the 'attributable gain' to which your share relates)
    • the type of capital gain to which your share relates and the method used by the trustee to calculate it (including any CGT discount or small business concessions applied), and
    • your share of any credit for a foreign resident capital gains withholding amount.

    Your share of a capital gain is any amount of the capital gain to which you are specifically entitled plus your adjusted Division 6 percentage share of any amount of the capital gain to which no beneficiary is specifically entitled.

    For more information on how to determine these amounts, see Specifically entitled and Adjusted Division 6 percentage.

    These rules do not apply to a distribution of a capital gain by an AMIT. See Managed investment trusts for more information.

    Divide by the total capital gain

    That amount is then divided by the total capital gain to give you your ‘fraction’ of the total capital gain.

    Multiply your fraction of the capital gain by the trust's taxable income relating to the capital gain

    Your fraction is then multiplied by the net income for tax purposes of the trust that relates to the capital gain. The result is your ‘attributable gain’.

    In certain circumstances where the trust's net capital gain and total net franked distributions exceed the net income of the trust for tax purposes, the amount of the trust's taxable income relating to the capital gain is rateably reduced. This ensures that beneficiaries and the trustee cannot be assessed on more than the total net income of the trust.

    Extra capital gains you are taken to have made

    If you are a beneficiary who is taken to have an 'attributable gain' (your share of a trust’s capital gain included in its net income for tax purposes), you are taken to have made extra capital gains in addition to any other capital gains you may have made from your own CGT events.

    These extra capital gains are taken into account in working out your net capital gain for 2017–18. You include them at step 2 in part B or part C.

    In order to work out the amount of extra capital gains that are taken into account in working out your own net capital gain, you will need to know the method used by the trustee in calculating the trust’s capital gains that were included in the trust’s net capital gain. Your statement of distribution or advice should show this information.

    If you are a unit holder in a managed fund, the trustee or manager will generally advise you of your share of the trust’s net capital gain, together with details of your share of any other income distributed to you.

    In other cases, the trustee may have advised you what your share is or you may need to contact them to obtain details.

    Trust distributions to which the CGT discount or the small business 50% active asset reduction apply

    Your 'attributable gain' is then grossed up as appropriate for any CGT concessions (the general CGT discount or the small business 50% reduction) applied by the trustee to that capital gain. You have an extra capital gain equal to the grossed-up amount.

    Where the trustee reduced the capital gain by the CGT discount or the small business 50% active asset reduction, you need to gross up your 'attributable gain' by multiplying it by two. This grossed-up amount is an extra capital gain.

    You multiply by four your attributable gain that the trust has reduced by both the CGT discount and the small business 50% active asset reduction. This grossed-up amount is an extra capital gain.

    If the capital gain has not been reduced by either the CGT discount or the small business 50% active asset reduction, then your 'attributable gain' is an extra capital gain.

    You are then able to reduce your extra capital gains by any current or prior year capital losses that you have, and then apply any relevant discounts to work out your own net capital gain.

    No double taxation

    You are not taxed twice on these extra capital gains because you did not include your capital gains from trusts at item 13 on your tax return (supplementary section).

    Example 16: Applying the trust provisions

    Step 1: determine the beneficiary’s share of the capital gain of the trust

    The Cropper Trust generated $100 of rent and a $500 capital gain (which was a discount capital gain). The trust also had a capital loss of $100. The trust deed does not define ‘income’ and therefore capital gains do not form part of the trust income. As a result, the income of the trust estate is $100 (being an amount equal to the rent), whereas the net income of the trust for tax purposes is $300. The $300 net income for tax purposes comprises the $200 net capital gain (which is the $500 capital gain less the $100 capital loss, reduced by the 50% CGT discount) plus the $100 rent income.

    The trustee resolves to distribute $200 related to the capital gain (after absorbing the capital loss) to Shane and the $100 of rent to Andrea.

    Shane is specifically entitled to 50% of the $500 capital gain because he can reasonably be expected to receive the economic benefit of 50% of the $400 capital gain remaining ($200) after accounting for the $100 capital loss. Shane’s share of the capital gain equals the amount to which he is specifically entitled namely $250 (50% of the $500 capital gain).

    Andrea’s share of the capital gain is also $250 because, being entitled to all of the $100 income of the trust (none of the capital gain being treated as trust income), she has an adjusted Division 6 percentage of 100% and there is $250 of the $500 capital gain to which no one is specifically entitled.

    Step 2: divide by the total capital gain

    Shane divides his share of the capital gain ($250) by the total capital gain ($500) and therefore has a fraction share of ½ of the capital gain.

    Andrea divides her share of the capital gain ($250) by the total capital gain ($500) and therefore also has a fraction share of ½ of the capital gain.

    Step 3: multiply the beneficiary’s fraction of the capital gain by the trust’s taxable income relating to the capital gain

    The net income of the trust for tax purposes relating to the capital gain is $200.

    Shane’s attributable gain is $100 ($200 × ½).

    Andrea’s attributable gain is $100 ($200 × ½).

    Step 4: gross up the amount for CGT discounts applied by the trustee

    Shane is required to double his attributable gain of $100 to an extra capital gain of $200 because the trustee had applied the 50% CGT discount.

    Andrea similarly doubles her attributable gain to $200 which is her extra capital gain.

    Both Shane and Andrea will take their extra capital gain of $200 into account in working out their own net capital gain at 18. Shane and Andrea are individuals entitled to claim the 50% CGT discount. Neither have other capital gains or capital losses of their own to apply against their extra capital gains. Therefore, after applying the 50% CGT discount to their $200 extra capital gain, they will have made a net capital gain of $100 ($200 extra capital gain × 50% = $100). They will write $100 at A item 18 Capital gains on their tax returns (supplementary section). They also write $200 (which is $100 grossed up) at H item 18.

    Note that Shane and Andrea's statement of distribution or advice from the trust advised each of them that the trust had made a capital gain of $500, that only $200 of this had been included in the net income of the trust estate for tax purposes, that the 50% discount had been applied and that their share of the gain was $250. Alternatively, it could have advised them that they each had an extra capital gain of $200 that was a discount capital gain.

    End of example

     

    Example 17: Distribution where the trust claimed concessions

    Serge is the sole beneficiary in the Shadows Unit Trust. His statement of distribution or advice from the trust shows that his 100% share of the net income of the Shadows Unit Trust for income tax purposes was $2,000. The $2,000 includes a net capital gain of $250 (made of a $1,000 capital gain that was reduced by the CGT discount and the small business 50% active asset reduction).

    His statement advises him that he has a 100% share of the capital gain which is $1000.

    Because he has a 100% share of the capital gain, Serge will have an 'attributable gain' of $250 (that is, the whole of the net income of the trust estate for tax purposes that relates to the gain).

    Due to the application of the CGT discount and the small business 50% active asset reduction, Serge then grosses up his 'attributable gain' of $250 by multiplying it by 4 to $1,000 which is his extra capital gain.

    Serge has also made a capital loss of $100 from the sale of shares.

    He calculates his own net capital gain as follows:

    Serge’s extra capital gain (that is, his $250 attributable gain × 4)

    $1,000

    Deduct capital losses

    $100

    Capital gains before applying discounts

    $900

    Apply the CGT discount of 50%

    $450

    Apply the 50% active asset reduction

    $225

    Net capital gain

    $225

    Serge will write $1,000 at H item 18 on his tax return (supplementary section), which is his total current year capital gain. The net capital gain he will write at A item 18 on his tax return (supplementary section) is $225. He will write a trust distribution of $1,750 ($2,000 − $250) at U item 13 on his tax return (supplementary section).

    End of example

    Applying the concessions

    You must use the same method as the trust to calculate your capital gain.

    This means you cannot apply the CGT discount to capital gains distributed to you from the trust calculated using the indexation method or 'other' method.

    You can only apply the small business 50% active asset reduction to grossed-up capital gains to which the trust applied that concession.

    Investors in Managed Funds

    If you are a unit holder in a managed fund and have received a distribution from a trust that includes a net capital gain, take your share of that net capital gain into account in working out your own net capital gain for the year, to the extent that it does not exceed the overall net amount of your distribution from the trust; see examples 18 and 19.

    Your statement of distribution or advice should show your share of the trust net capital gain and other information relevant to that gain, including your share of any credit for a foreign resident capital gains withholding amount.

    If your statement shows that your share of the trust’s net capital gain is more than the overall net amount of your distribution, then there is a limit on the amount of the capital gain component you exclude from L item 13 Partnerships and trusts on your tax return (supplementary section). In this situation, you cannot exclude an amount greater than the overall net amount of your distribution from the trust; see examples 18 and 19. The amount of your share of the trust’s net capital gain you exclude from the amount at L item 13 Partnerships and trusts is used in working out your capital gain. If you receive a distribution from more than one trust, this applies to each distribution.

    Trust distributions to which the CGT discount or the small business 50% active asset reduction apply

    Your statement should show whether any discounts or reductions were applied by the trustee in determining the amount of the capital gain.

    If you have a share of a trust’s net capital gain you are taken to have made extra capital gains in addition to any other capital gains you may have made from your own CGT events.

    These extra capital gains are taken into account in working out your net capital gain for 2017–18. You include them at step 2 in part B or part C.

    You need to know whether the trustee applied any discounts or reductions in calculating the capital gain to which your share relates in order to work out the correct amount to include in your own net capital gain calculation.

    Where the trustee reduced one or more capital gains by the CGT discount or the small business 50% active asset reduction, you need to gross up your share of any such capital gain by multiplying it by two. This grossed-up amount is your extra capital gain that you include in your own net capital gain calculation.

    You multiply by four your share of any capital gain from a trust that the trustee has reduced by both the CGT discount and the small business 50% active asset reduction. This grossed-up amount is your extra capital gain that you include in your own net capital gain calculation.

    If your share of a capital gain from a trust is attributable to a capital gain that the trustee has not reduced by one of these concessions, that amount is your extra capital gain. You include this amount in your own net capital gain calculation.

    This calculation lets you reduce your extra capital gains by any current or prior year capital losses that you have, and then apply any relevant discounts to work out your own net capital gain; see example 19.

    No double taxation

    You are not taxed twice on these extra capital gains because you did not include your capital gains from trusts at item 13 on your tax return (supplementary section).

    Example 18: Capital gain greater than share of trust net income and capital gain was discounted

    Daniel’s statement of distribution or advice from a Managed Fund (other than an AMIT) shows that his share of the net income of that trust for tax purposes was $7,000.

    This is made up of his $3,000 proportionate share of the trust’s non-primary production loss and his $10,000 proportionate share of the trust’s net capital gain to which the trust applied the 50% CGT discount. Daniel also made a $2,000 capital loss during the year on the sale of some shares. He does not have any other trust distributions for the year.

    Daniel writes zero at 13 Partnerships and Trusts on his tax return. He takes $14,000 (that is, the $7,000 remaining of his share of the capital gain from the trust grossed up) into account in working out his net capital gain at item 18. Therefore, after deducting the capital losses from the grossed up capital gain:

    • he is taken to have made ($14,000 − $2,000 = $12,000)
    • he applies the 50% CGT discount ($12,000 × 50% = $6,000)
    • he writes $6,000 at A item 18 Capital gains on his tax return (supplementary section)
    • he writes $14,000 ($7,000 grossed up) at H item 18.
    End of example

     

    Example 19: Capital gain greater than share of trust net income and capital gain was not discounted

    Debra’s statement of distribution or advice from a Managed Fund (other than an AMIT) shows that her share of the net income of that trust for tax purposes was $2,000.

    This is made up of her $5,000 proportionate share of the trust’s primary production loss, her $2,000 proportionate share of the trust’s non-primary production income and her $5,000 proportionate share of the trust’s net capital gain. (The trust’s net capital gain does not include any discounted gains.)

    At 13 Partnerships and Trusts on her tax return (supplementary section), Debra will write $5,000 loss from primary production at L and $5,000 non-primary production income at U (that is, $2,000 non-primary production income plus sufficient net capital gain [$3,000] to offset the loss from primary production).

    Assuming Debra has no other capital gains or capital losses, she will write $2,000 ($5,000 − $3,000) at H and A item 18 Capital gains in her tax return (supplementary section).

    End of example
    Last modified: 22 Jun 2018QC 55220