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  • Eligibility for making a capital treatment election

    A trust will be eligible to make a capital treatment election if it meets the definition of a MIT. The election must be made in the first year the trust is a MIT.

    The definition of a MIT has changed since the start of the capital treatment rules in 2008–09. There were extensive amendments in 2010, and further amendments in 2016. You should consider the definition of a MIT at the relevant time in determining whether the MIT is eligible to make a capital treatment election in a specific year.

    See also:

    Changes under the new tax system for MITs

    A new tax system for MITs came into effect in May 2016. Under the new system, a number of definitional changes affect capital treatment elections by MITs. These include relocation of the definition of a MIT to section 275-10 of the ITAA 1997.

    When the eligibility of the trust changes

    Capital treatment by reason of having made an election will not apply in any year in which the trust ceases to be a MIT. Disposals of eligible assets in these years are subject to tax by reference to general tax law principles.

    If the trust again meets the definition of a MIT in a later income year, the capital treatment election will apply because the election, once made, is irrevocable.

    Example

    Bayley Trust is a MIT that has made an election into capital treatment, which is in force for 2008–09 and later income years.

    In the 2010–11 income year, Bayley Trust fails to meet the definition of a MIT, so the capital treatment election does not apply in that year. Bayley Trust disposes of units in a unit trust during the year. Because the capital treatment election does not apply, the character of the gain from the disposal of the units will be determined in accordance with general tax law principles.

    End of example

    Eligible CGT assets

    Assets eligible for capital treatment are:

    • shares in a company (including a foreign hybrid company)
    • non-share equity interests in a company
    • units in a unit trust
    • land (including an interest in land)
    • a right or option to acquire or dispose of any assets listed above.

    However, an asset is not an eligible asset if it is a debt interest, or a financial arrangement to which Taxation of Financial Arrangements (TOFA) applies.

    Special rules

    Some assets will not be eligible for capital treatment, even where the trustee has made an election for capital treatment. Generally, these will be assets purchased and/or held as trading stock, and include:

    • land, an interest in land, or a right or option to acquire or dispose of such an asset, which is held as trading stock or which was acquired before 20 September 1985 and is part of a profit-making undertaking or plan
    • an asset acquired in an income year in which the capital treatment election was not in force, and the asset was treated as trading stock in the MIT's financial report and income tax return for
      • the most recent income year ending before the income year in which the election first came into force
      • the most recent income year ending before the time of the CGT event.
       

    Example

    Griffin Trust is a MIT and has made an election which is in force for the 2008–09 and later income years.

    In the 2009–10 income year, Griffin Trust disposes of units in a unit trust which it had been treating as trading stock in both its financial report and income tax return for the 2007–08 and 2008–09 income years. The units were acquired in 2007.

    Although Griffin Trust has made an election for capital treatment, any gain or loss from the disposal of the units will not be assessed under the CGT provisions.

    This is because the units were acquired before the election was in force, and the asset had previously been treated as trading stock in the Griffin Trust financial report and income tax return for both the 2007–08 income year (being the most recent income year prior to the income year in which the election was made) and the 2008–09 income year (being the most recent income year ending before the time of the CGT event).

    End of example

    Making a capital treatment election

    The trustee of an eligible MIT can make an election for capital treatment.

    Trusts that became a MIT prior to the 2009–10 income year

    When must you make an election?

    You must make an election on or before the latest of the following days:

    • 2 September 2010
    • a later date, if we allow it.

    When will an election take effect?

    Once you make the election, it will have effect for the 2008–09 and later income years.

    How can you make an election?

    The period in which a trustee can make an election for a trust that became a MIT prior to the 2009–10 income year has now expired.

    However, we may allow a trustee to make the election upon request.

    Next steps:

    Trusts that became a MIT in 2009–10 or a later income year

    When must you make an election?

    You must make an election on or before the latest of the following days:

    • the day the trust is required to lodge its income tax return for the income year in which it became a MIT
    • a later date, if we allow it.

    When will an election take effect?

    Once you make the election, it will have effect for the income year in which the trust becomes a MIT and later income years.

    How can you make an election?

    If you are the trustee of a MIT, you can make an election by answering 'Yes' to the following question on the Trust tax return:

    • If the trust is a managed investment trust, has the trustee made an election for capital account treatment?

    If you are the trustee of an AMIT, you can make an election by answering 'Yes' to the following question on the AMIT tax return:

    • Has the trustee made an election into managed investment trust capital account treatment?

    You must make the election within the relevant timeframe.

    If you are the trustee of a trust that became a MIT prior to the 2009–10 income year, and you have previously made an election for capital treatment, you still need to answer 'Yes' to this question for each year you are required to complete a Trust tax return or AMIT tax return.

      Last modified: 09 May 2016QC 23181