Where the trustee is assessed
On behalf of certain beneficiaries
A trustee may be assessed and liable to pay tax under section 98 of the ITAA 1936 in respect of a beneficiary. In this circumstance, Subdivision 115-C of the ITAA 1997 requires the trustee to increase the amount to be assessed to reflect the beneficiary's attributable gains.
This applies if a non-resident beneficiary or a beneficiary under a legal disability is specifically entitled to all or part of a capital gain or such a beneficiary has an adjusted Division 6 percentage of a capital gain.
If the trustee is assessed in respect of a non-resident corporate beneficiary or a non-resident trustee beneficiary and the assessment relates to a discount capital gain or a share of a discount capital gain, the trustee must double the corresponding amount assessed to them under section 98 of the ITAA 1936. In effect, this prevents beneficiaries of the trust that are non-resident companies or non-resident trusts from getting the benefit of the CGT discount.
On income to which no beneficiary is presently entitled
A trustee may also be assessed under section 99 or section 99A of the ITAA 1936 if there is trust income to which no beneficiary is presently entitled. In this circumstance, Subdivision 115-C of the ITAA 1997 requires the trustee to increase their assessment to reflect their share of the trust's capital gains.
If the trustee is assessed under section 99A of the ITAA 1936 and the assessment relates to a discount capital gain or a share of a discount capital gain, the trustee must double the corresponding amount assessed to them under section 99A of the ITAA 1936. The same applies if the assessment relates to a capital gain that was reduced by the small business 50% reduction. If the capital gain was reduced by both discounts, the trustee must quadruple the amount assessed under section 99A. These requirements to double or quadruple the amount don't apply where the trustee is assessed under section 99 of the ITAA 1936.
Choosing to be assessed on the capital gain
The trustee of a resident trust may choose to be assessed on a capital gain of the trust provided the following conditions are met:
- making the choice is consistent with the terms of the trust
- the trust is a resident trust estate for tax purposes in the income year in which the capital gain is made
- the choice is made for the whole capital gain
- no beneficiary has received the benefit of the gain during the income year in which it was made or within two months of the end of that income year.
The trustee must make the choice within two months of the end of the income year or a later date if the ATO allows it.
If a trustee makes this choice, they are assessed on the net income of the trust relating to the capital gain under section 99 or 99A of the ITAA 1936 as appropriate.
A trustee might choose to pay tax on a capital gain if, for example, tax on the gain would otherwise be paid by:
- an income beneficiary who can't benefit from the gain because the gain is capital under the terms of the trust
- a capital beneficiary who is unable to benefit from the gain during the income year in which it is made, or within two months of the end of that year.
Example: choosing to be assessed on a capital gain of the trust
The Ngo Trust is a resident trust for tax purposes. It is a unit trust with different income and capital unit holders.
Under the deed, the capital unit holders have an entitlement to the capital gains made by the trust, but can't demand payment of those gains until certain events occur, which will be much later than when the gain is made.
The trust makes a $200 capital gain. After applying the CGT discount, a net capital gain of $100 is included in the trust's net income.
The capital unit holders are specifically entitled to the capital gain and therefore, for tax purposes, are taken to have made the capital gain themselves. As they currently can't demand payment of the $200 capital gain and therefore have no cash flow from which to pay the corresponding tax liability, the trustee chooses to be assessed on the capital gain.
The trustee will be assessed on either:
- $100 – if assessed under section 99 of the ITAA 1936
- $200 (that is, grossed up to reverse the CGT discount) – if assessed under section 99A of the ITAA 1936.
As a result of the trustee's choice, the capital unit holders are taken not to have made a capital gain.
End of example