There are four steps in calculating a beneficiary's extra capital gain and the capital gain a trustee is assessed on. Each capital gain of the trust is calculated separately.
Step 1: determine the share
A beneficiary or trustee's share of a capital gain of a trust is a dollar amount that comprises both:
- any part of the capital gain they are specifically entitled to
- a proportionate share of any part of the capital gain remaining after all specific entitlements to it have been determined.
The beneficiary or the trustee's proportionate share of any remaining capital gain is their adjusted Division 6 percentage of that gain.
A beneficiary's adjusted Division 6 percentage is the trust income to which they are entitled, expressed as a percentage (excluding any franked distributions or capital gains to which any entity is specifically entitled).
The trustee's adjusted Division 6 percentage is their share of the trust income (excluding any franked distributions or capital gains to which any entity is specifically entitled) which no beneficiary is presently entitled to, expressed as a percentage.
Step 2: the share as a percentage of the capital gain
To work out the percentage of the capital gain this share represents, divide the amount worked out at step 1 by the total amount of the capital gain and multiply by 100.
Step 3: determine the attributable gain
Multiply the net income that relates to the capital gain by the percentage worked out at step 2. The result is the beneficiary or trustee's attributable gain.
Generally, the net income of the trust that relates to the capital gain is the taxable amount of the capital gain remaining after the trustee has applied any capital losses, including carried forward losses, and the CGT discount or small business concessions (if relevant).
This net income amount will equal the trust's net capital gain if the trust only has one capital gain.
The trustee can choose the order in which the capital losses and net capital losses are applied against individual capital gains of the trust. This may reduce the taxable amount for a particular capital gain to zero.
Step 4: gross up the attributable gain
Beneficiary
The beneficiary's attributable gain must be grossed up to adjust for any discounts the trustee has applied to that gain, so if:
- no discounts were applied, there is no gross up
- either (but not both) the general CGT discount or the small business 50% reduction was applied, the amount is doubled
- both discounts were applied, the amount is quadrupled.
The attributable gain (grossed up as appropriate) gives the beneficiary an extra capital gain. Beneficiaries treat extra capital gains the same way they would treat any capital gain. That is, they may reduce it by any current or prior year capital losses they have and apply any relevant discounts to work out their own net capital gain.
Example: tax treatment of trust capital gains
In 2019–20, Trailerpark Trust:
- received rental income of $50,000
- made a discountable capital gain of $150,000
- had a carried forward capital loss of $10,000.
The trust deed states that capital gains form part of trust income. The trust's capital gain as calculated under the deed is therefore $140,000 (that is, after the capital loss was subtracted).
The trust's income is $190,000, made up of the $50,000 rental income and the $140,000 capital gain.
The trust's net capital gain for tax purposes is $70,000, which is the $150,000 capital gain, less the $10,000 capital loss, reduced by the 50% CGT discount (($150,000 – $10,000) x 50% = $70,000). The net income of the trust is therefore $120,000, made up of $50,000 rental income and the net capital gain of $70,000.
The trust has two resident beneficiaries, Ricky and Julian, neither under a legal disability. In accordance with a power under the deed, by written resolution the trustee makes Julian presently entitled to $110,000 of the capital gain.
$80,000 of trust income remains unallocated ($190,000 – $110,000). The trust deed states that any remaining income is to be split equally between Ricky and Julian as beneficiaries. This results in each being presently entitled to an additional $40,000 ($80,000 divided by two).
Working out each beneficiary's extra capital gain
Working out each beneficiary's extra capital gain involves four steps.
Step 1: determine the share
Each beneficiary's share of the capital gain is made up of both:
- any amount they are specifically entitled to
- their adjusted Division 6 percentage share of the part of the capital gain to which no beneficiary is specifically entitled to.
Ricky is not specifically entitled to any part of the capital gain.
Julian's specific entitlement to the capital gain is calculated as follows:
Capital gain x (share of net financial benefit / net financial benefit)
= 150,000 x (110,000 / 140,000)
= $117,857
Therefore, the amount of the capital gain to which no beneficiary is specifically entitled is $32,143 (that is, $150,000 – ($0 (Ricky’s share) + $117,857 (Julian’s share)).
To work out each beneficiary's share of this remaining $32,143 capital gain, they first need to work out their adjusted Division 6 percentage of the trust's income. This is done by:
- working out their present entitlement to trust income, excluding any capital gains and franked distributions they are specifically entitled to
- expressing the result as a percentage of the amount of trust income, excluding any capital gains or franked distributions any entity is specifically entitled to.
Ricky and Julian’s specific entitlements to the capital gain of the trust have been calculated above.
Therefore, trust income, excluding the capital gains to which any entity is specifically entitled, is $72,143 ($190,000 income less Julian’s specific entitlement to the capital gain of $117,857).
Ricky's adjusted Division 6 percentage is calculated as follows:
- Ricky's present entitlement to trust income less his specific entitlement, which is $40,000 ($40,000 – nil specific entitlement)
- divided by $72,143 being the trust income excluding amounts of capital gains and franked distributions any entity is specifically entitled to
- = 55.45%
Julian's adjusted Division 6 percentage is calculated as follows:
- Julian's present entitlement to trust income, which is $150,000 (made up of the $110,000 + $40,000) less his specific entitlement to the capital gain ($117,857) = $32,143
- divided by $72,143 being the trust income excluding capital gains and franked distributions any entity is specifically entitled to
- = 44.55%
Each beneficiary's share of the capital gain is made up of:
- any amount they are specifically entitled to, and
- their adjusted Division 6 percentage shares of the amount of the capital gain to which no beneficiary is specifically entitled ($32,143).
Therefore, each beneficiary's respective share of the capital gain is:
- Ricky: $0 + (55.45% x $32,143) = $17,823
- Julian: $117,857 + (44.55% x $32,143) = $132,177
Step 2: the share as the percentage of the capital gain
Each beneficiary's percentage share of the trust's capital gain is calculated by dividing their share by the total capital gain and multiplying by 100:
- Ricky: ($17,823 / $150,000) x 100% = 11.88%
- Julian: ($132,177 / $150,000) x 100% = 88.12%
Step 3: determine the attributable gain
Each beneficiary’s attributable gain is their share of the capital gain (expressed as a percentage) multiplied by the net income of the trust relating to the capital gain.
The net income of the trust relating to the capital gain is $70,000, calculated as the $150,000 capital gain less the $10,000 capital loss reduced by the 50% CGT discount = $70,000.
Multiply the $70,000 by each beneficiary's percentage share of the capital gain (worked out at step 2) to work out their attributable gain:
- Ricky: $70,000 x 11.88% = $8,316
- Julian: $70,000 x 88.12% = $61,684
Step 4: gross up the attributable gain
As the trustee applied the 50% CGT discount to the capital gain, each beneficiary must double their attributable gain (worked out at step 3) to work out their extra capital gain as follows:
- Ricky: $8,316 x 2 = $16,632
- Julian: $61,684 x 2 = $123,368
Ricky and Julian add their extra capital gain to any of their own capital gains before deducting any current or prior year capital losses they have and applying any relevant discounts to determine their own net capital gain. As they are individuals, they are entitled to the 50% CGT discount.
If they have no other capital gains or capital losses:
- Ricky would have a net capital gain of $8,316 ($16,632 reduced by the 50% CGT discount)
- Julian would have a net capital gain of $61,684 ($123,368 extra capital gain reduced by the 50% CGT discount).