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  • Deductions – items 16 to 21

    In this section:

    16 Deductions relating to Australian investment income, franked distributions

    If the trust was paid a dividend by a LIC directly and the dividend included a LIC capital gain amount, the trust can claim a deduction of 50% of the LIC capital gain amount. If the LIC dividend is franked (either fully or partially) then show at R any deduction relating to a LIC capital gain. If the LIC dividend is unfranked, then show at P any deduction relating to the LIC capital gain. The LIC’s dividend advice statement shows the LIC capital gain amount.

    Show expenses that are directly related to franked distributions which are derived by the trust directly (rather than through another trust or partnership) at item 16 Deductions relating to: Franked distributions. These deductions should not include deductions shown at item 8 Deductions relating to franked distributions from trusts in label F. Expenses related to unfranked distributions are shown at item 16 Deductions relating to: Australian investment income.

    Expenses listed here that are costs associated with borrowing and servicing debt may not be allowable deductions under the thin capitalisation rules; see Appendix 3. The disallowed amount reduces the amount that would otherwise go at P or R.

    Deductions for the decline in value of depreciating assets used to earn interest and dividends are generally shown at P or R. However, if the trust has allocated some of these assets to a low-value pool, you may need to show deductions at Q item 18. For more information, see Appendix 6.

    If the TOFA rules apply to the trust, include all deductions relating to Australian investment income from financial arrangements subject to the TOFA rules at P or R.

    Former STS taxpayers still using the STS accounting method

    If the trust is eligible and has chosen to continue using the STS accounting method, it can claim general deductions (for example, interest expense) only when they are paid. For more information on the STS accounting method, see Appendix 13.

    17 Forestry managed investment scheme deduction

    A trust may be entitled to claim a deduction at this item for payments made to an FMIS if:

    • the trust currently holds a forestry interest in an FMIS, or held a forestry interest in an FMIS during 2020–21
    • the trust paid an amount to a forestry manager of an FMIS under a formal agreement
    • the forestry manager has advised the trust that the FMIS satisfies the 70% direct forestry expenditure rule in Division 394 of the ITAA 1997
    • the trust does not have day to day control over the operation of the scheme
    • there is more than one participant in the scheme, or the forestry manager or an associate of the forestry manager manages, arranges or promotes similar schemes, and
    • the trees are established within 18 months of the end of the income year in which an amount is first paid under the FMIS by a participant in the scheme.

    If the trust is an initial participant in an FMIS it can claim initial and ongoing payments at this item. The trust cannot claim a deduction if it has disposed of its forestry interest in an FMIS within four years after the end of the income year in which it first made a payment. However, the deduction will be allowed if the disposal occurs because of circumstances outside of the trustee's control, provided the trustee could not have reasonably foreseen the disposal happening when they acquired the interest. Disposals that would generally be outside the trustee's control may include compulsory acquisition, insolvency of the trust or the scheme manager, or cancellation of the interest due to fire, flood or drought.

    If the trust is a subsequent participant, it cannot claim a deduction for the amount paid for acquiring the interest. The trust can only claim a deduction for ongoing payments. The deduction is claimed in the income year in which the payment is made.

    Relevant terms are explained at 10 Forestry managed investment scheme income.

    Excluded payments

    The trust cannot claim a deduction at this item for any of the following payments (see section 394-10 and section 394-40 of the ITAA 1997):

    • payments for borrowing money
    • interest and payments in the nature of interest (such as a premium on repayment or redemption of a security, or a discount of a bill or bond)
    • payments of stamp duty
    • payments of GST
    • payments that relate to transportation and handling of felled trees after the earliest of the following:    
      • sale of the trees
      • arrival of the trees at the mill door
      • arrival of the trees at the port
      • arrival of the trees at the place of processing (other than where processing happens in-field)
       
    • payments that relate to processing
    • payments that relate to stockpiling (other than in-field stockpiling).

    The trust may claim a deduction for some of these expenses at another item.

    Show at D the total amount of deductible payments made to an FMIS.

    18 Other deductions

    Show at Q any deductible losses and outgoings not already claimed by the trust at any other items.

    If the trust is registered for GST, exclude any input tax credit entitlements for expenses incurred by the trust from the amount shown at Q.

    In this section:

    Former STS taxpayers still using the STS accounting method

    If the trust is eligible and has chosen to continue using the STS accounting method, it can claim deductions for the following expenses only when they are paid:

    • general deductions, for example interest expense
    • tax-related expenses
    • expenses for repairs.

    For more information on the STS accounting method, see Appendix 13.

    Losses and outgoings

    You can claim a deduction for losses and outgoings if they are incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing such income.

    However, under section 25–90 of the ITAA 1997, a trust may be able to claim a deduction for costs incurred in obtaining or servicing debt interests (as defined in ITAA 1997) if the costs are incurred in earning foreign source income which is non-assessable non-exempt income under section 768-5 of the ITAA 1997, section 23AI or 23AK of the ITAA 1936. The amount of the deduction is subject to any reduction required by the thin capitalisation rules. Similar rules apply under subsection 230-15(3) of the ITAA 1997 in relation to your debt interest that is a financial arrangement covered by the TOFA rules.

    Debt deductions (such as interest and borrowing costs) incurred in earning assessable foreign source income that are not attributable to an overseas permanent establishment of the taxpayer should be included at Q. You can deduct these expenses against assessable income of the trust, subject to any reduction required under the thin capitalisation rules. Do not include them in the calculation of the net foreign source income at item V in 23 Other assessable foreign source income or any other item.

    You cannot claim a deduction for the following:

    • losses or outgoings of capital or of a capital, private or domestic nature, except where special provision is made in the income tax law
    • expenses incurred in gaining or producing exempt or non-assessable non-exempt income – except certain debt deductions under section 25–90 or subsection 230-15(3) of the ITAA 1997
    • penalties or fines
    • income tax liabilities
    • entertainment, except in very limited circumstances
    • costs associated with borrowing and servicing debt to the extent that a deduction is denied under the thin capitalisation rules.

    For more information, see Appendix 3. The disallowed amount reduces the amount that would otherwise be shown in Q.

    Interest expenses

    If a trustee borrows money to pay distributions to a beneficiary, the trustee will only be able to take into account the interest expenses incurred on those borrowed funds when calculating the net income of a trust estate in certain circumstances; see TR 2005/12 Income tax: deductibility of interest expenses incurred by trustees on funds borrowed in connection with the payment of distributions to beneficiaries.

    In order to be deductible, the interest expense must be sufficiently connected with the assessable income earning activity of the trust. There will be sufficient connection if the purpose of the trustee borrowing funds is to refinance a returnable amount. Trustees who have incurred interest expenses on monies borrowed to pay distributions to beneficiaries should seek advice either from their professional advisers or from us.

    Tax-related expenses

    Show at Q any expenses incurred by the trust in the management of its tax affairs. These expenses include:

    • the cost of attending an audit by us
    • tax planning
    • expenditure on your income tax affairs, that is, a fee or commission for professional advice where the advice is provided by a registered tax agent, a barrister or solicitor
    • an interest charge imposed by us on taxes and penalties
    • a penalty for underestimating a varied GST instalment or PAYG instalment.

    Show a deduction for the decline in value of a depreciating asset used in managing the tax affairs of the trust at Q. For more information about working out decline in value, see Appendix 6.

    You cannot claim a deduction for costs for any offence-related matter, for example, the cost of defending a tax prosecution.

    If expenditure allowed or allowable as a deduction is recouped, include the amount recouped in assessable income in the year of recoupment.

    Losses on the disposal of traditional securities

    Show at Q any non-capital losses incurred upon the disposal or redemption of a traditional security which are deductible under section 70B of the ITAA 1936. For more information about gains and losses on traditional securities, including traditional securities that are convertible notes or exchangeable notes, see You and your shares 2021.

    TOFA amounts from financial arrangements

    If the TOFA rules apply to calculate an assessable gain or deductible loss on the trust’s financial arrangements, include at this item those deductible losses relating to the financial arrangements.

    TOFA amounts that have been included elsewhere should not be included here, for example amounts that have already been included at:

    • S Net income or loss from business item 5
    • G Interest deductions item 9.

    If what you show at Q or any other deduction label includes an amount which is brought to account under the TOFA rules, also complete item 31 Taxation of financial arrangements (TOFA).

    Payment of premiums to a non-resident insurer

    You can only claim a deduction for insurance premiums paid to a non-resident insurer for the insurance of property situated in Australia or of an event which can happen only in Australia where:

    • the premium would otherwise be deductible to the trust
    • arrangements have been made to our satisfaction for the payment of any tax payable or which may become payable in relation to the premium.

    Keep records of the details supporting any claim for a deduction.

    Gifts

    In some trusts, the trustee may have the power to make gifts or donations from the trust fund.

    The trust can only claim a deduction for gifts (including cash) made to an organisation which is a deductible gift recipient (DGR). DGRs are endorsed by us or specifically named in income tax law. Some of the types of bodies that can be endorsed as DGRs are public benevolent institutions, school building funds and approved overseas aid funds.

    To check whether the organisation is a DGR, go to ABN LookupExternal Link or phone 1300 130 248.

    Gifts of $2 or more of certain property, or money, may be deductible. This includes gifts of property that we value at more than $5,000, and property purchased by the donor during the 12 months before the gift was made, and shares valued at $5,000 or less acquired in an Australian publicly listed company at least 12 months before the gift was made.

    If claiming a donation for property that we value at more than $5,000, or under the Cultural Gifts Program, or to National Trust bodies, keep the required valuation certificates.

    A trust may elect to spread deductions over five income years or less, where the gift is money, or property that we value at more than $5,000. Special requirements apply for spreading deductions for certain environmental, heritage and cultural property gifts.

    For more information, see Receiving tax deductible gifts.

    Deductions for political contributions and gifts

    Only individuals can deduct contributions and gifts to political parties and independent members and candidates; and the individual claiming the deduction must not have made the gift or contribution in the course of carrying on a business.

    Show at Q the deduction for gifts to DGRs. The deduction cannot add to or create a tax loss. You may need to reduce the claim where the amount at item 20 Net Australian income or loss is a loss.

    Subscriptions

    Show at Q any expenses incurred for subscriptions paid to:

    • trade, business or professional associations
    • other organisations where the subscription expense is incurred in producing assessable income
    • journals or magazines related to producing assessable income.

    Do not claim for fees paid for membership of a sporting or social club, or a political party.

    Deductions for depreciating assets in a low-value pool

    If the trust has allocated depreciating assets used for different income-producing purposes to its low-value pool (for example, some assets are used for producing rental income, or carrying on a business) and it has not shown them at any other item, show the low-value pool deduction at Q. For more information, see Appendix 6.

    Film industry incentives

    The conditions under which concessions are available for the Australian film industry are explained in Film industry incentives 2021.

    19 Total of items 16 to 18

    Show at item 19 the total deductions relating to Australian income.

    20 Net Australian income or loss

    Show at $ the net income or loss relating to Australian income, that is, total Australian income, minus total deductions. If this amount is a loss, print L in the box at the right of the amount.

    21 Capital gains

    In this section:

    Did you have a CGT event or did the trust have an amount of capital gain(s) from another trust during the year?

    If the trust had a CGT event happen during the income year, or if the trust's share of the net income of another trust included an amount attributable to a capital gain made by that other trust, print X in the Yes box at G. Otherwise, print X in the No box at G.

    Generally a trust makes a capital gain or capital loss if certain events or transactions, called CGT events, happen. Most commonly, CGT events happen to a trust’s CGT assets (for example, the disposal of a CGT asset) while other CGT events relate directly to capital receipts (capital proceeds).

    If the trust ceases to hold or use a depreciating asset which was used for both taxable and non-taxable purposes, a CGT event may happen to the asset. A capital gain or capital loss attributable to that non-taxable use may arise, for more information see Guide to depreciating assets 2021.

    An Australian resident makes a capital gain or capital loss if a CGT event happens to any of its worldwide CGT assets.

    The CGT discount rules generally don’t apply to foreign resident individuals. This may affect trusts with foreign-resident individual beneficiaries. For more information, see Capital gains tax (CGT) discount for foreign resident individuals.

    If the trust disposed of cryptocurrency capital gains tax may be payable on the disposal. For more information see Tax treatment of cryptocurrencies.

    Foreign entities and CGT events

    A capital gain or capital loss from a CGT event may be disregarded if the trust is a foreign trust just before the CGT event happens, if it happens in relation to a CGT asset that is not taxable Australian property; see section 855-10 of the ITAA 1997.

    A CGT event in relation to an interest in a fixed trust held by a beneficiary who is a foreign resident may not be subject to CGT if at least 90% of the assets of the fixed trust directly or indirectly through a chain of fixed trusts in which the fixed trust has an indirect or direct interest are not taxable Australian property at the time of the CGT event (see section 855-40). If you are the trustee of such a fixed trust, you may need to attach sufficient additional information to the statement of distribution provided to the beneficiaries, to enable them to work out their CGT position.

    Include amounts subject to the foreign resident capital gains withholding at A item 21.

    Credit for amounts of foreign resident capital gains withholding

    For transactions entered into on or after 1 July 2017, a 12.5 percent withholding obligation will apply to the disposal of:

    • taxable Australian real property with a market value of $750,000 or more
    • an indirect Australian real property interest
    • an option or right to acquire such property or interest.

    Where the vendor of these Australian assets is a foreign resident, the purchaser must pay 12.5 percent of the purchase price to the ATO as a foreign resident capital gains withholding payment.

    The relevant foreign resident claims a credit for the foreign resident capital gains withholding amount except where the net income of the trust is less than the withholding amount. In these circumstances the trustee is entitled to the credit for the withholding amount on their running balance account.

    The previous market value exemption threshold of $2 million for real property and 10 percent withholding rate will apply for any contracts that were entered into before 1 July 2017 (even if settlement is after that date).

    For more information, see Capital gains withholding: Impacts on foreign and Australian residents.

    Include the amount of foreign resident capital gains withholding at B item 21.

    Have you applied an exemption or roll-over?

    If the trust has capital gains disregarded or deferred as a result of an application of a CGT exemption or roll-over, print X in the Yes box at M. If you printed X for Yes, you may need to provide details of certain CGT exemptions and roll-overs, if you are required to lodge a CGT schedule.

    Print in the CODE box at 21 M the codes from the list below that describe the CGT exemptions and roll-overs from which the trust has applied to disregard or defer a capital gain or capital loss made. If the trust applied more than one CGT exemption or roll-over, select all of the codes that apply. If you are lodging by paper, write the code that represents the CGT exemption or roll-over that produced the largest amount of capital gain or capital loss deferred or disregarded.

    CGT exemption or roll-over codes

    A Small business active asset reduction (Subdivision 152-C)

    B Small business retirement exemption (Subdivision 152-D)

    C Small business roll-over (Subdivision 152-E)

    D Small business 15-year exemption (Subdivision 152-B)

    E Non-resident CGT exemption (Division 855)

    F Scrip for scrip roll-over (Subdivision 124-M)

    H Demerger exemption (Subdivision 125-C)

    I Main residence exemption (Subdivision 118-B)

    J Capital gains disregarded as a result of the sale of a pre-CGT asset

    K Disposal or creation of assets in a wholly-owned company (Division 122)

    L Replacement asset roll-overs (Division 124)

    M Exchange of shares or units (Subdivision 124-E)

    N Exchange of rights or options (Subdivision 124-F)

    O Exchange of shares in one company for shares in another company (Division 615)

    P Exchange of units in a unit trust for shares in a company (Division 615)

    Q Disposal of assets by a trust to a company (Subdivision 124-N)

    R Demerger roll-over (Subdivision 125-B)

    S Same asset roll-overs (Division 126)

    T Small business restructure roll-over (Subdivision 328-G)

    U Early stage investor (Subdivision 360-A)

    V Venture capital investment (Subdivision 118-F)

    X Other exemptions and roll-overs.

    Use code T if you have either received or disposed of an asset under the Small business restructure roll-over provisions.

    For more information, see Guide to capital gains tax 2021.

    If the trust is required to lodge a CGT schedule, you may need to provide details of the capital gains deferred or disregarded as a result of applying certain CGT exemptions and roll-overs.

    CGT worksheets and schedules

    For more information about CGT events, see Guide to capital gains tax 2021 which includes:

    • a capital gain or loss worksheet for calculating a capital gain or capital loss for each CGT event
    • a CGT summary worksheet for calculating the trust’s net capital gain or capital loss
    • a CGT schedule.

    The worksheets will help you calculate a trust’s net capital gain or capital loss for the income year and complete the CGT entries on the trust tax return. You do not have to complete the worksheets. However, if you do, do not attach them to the trust tax return, but keep them with the trust’s tax records.

    Complete a CGT schedule and attach it to the trust tax return if the trust had:

    • total current year capital gains greater than $10,000, or
    • total current year capital losses greater than $10,000.

    Net capital gain

    The trust’s net capital gain is the total capital gains it made for the income year, less its current year capital losses, unapplied prior year net capital losses, CGT discount and any other relevant concessions. Relevant concessions are the small business:

    • CGT 50% active asset reduction
    • CGT 15-year asset exemption
    • CGT retirement exemption
    • CGT roll-over.

    Show at A the amount of the trust’s net capital gain. If you have used the CGT summary worksheet or CGT schedule, this is the amount at:

    If you showed an amount at Capital gains item 32 Non-concessional MIT income (NCMI), then those amounts at labels X and Z must be included in the calculation of the amount at 21A Net capital gain.

    For more information, see Guide to capital gains tax 2021 and Losses schedule instructions 2021.

    See also:

    Excepted net capital gain of a minor

    Include the amount of any excepted net capital gain of a minor at A and provide a statement on a separate sheet of paper:

    • detailing the distribution of excepted net capital gains to each beneficiary, and
    • listing each beneficiary who is considered to be an excepted person, giving supporting reasons.

    Attach this statement to the tax return and print X in the Yes box at Have you attached any ‘other attachments’? at the top of page 1 of the tax return.

    For an explanation of excepted income and excepted person, see Appendix 9.

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    Last modified: 27 May 2021QC 64913