If a beneficiary’s interest in a trust is fixed (for example, an interest in a unit trust) there are rules to deal with the situation where the trust distributes to the beneficiary an amount of capital gain that was excluded from the trust’s net income because it claimed the small business 50% active asset reduction.
The distribution of the small business 50% active asset reduction amount is a non-assessable amount under CGT event E4 in section 104-70 of the Income Tax Assessment Act 1997 (ITAA 1997).
The payment of the amount will firstly reduce the cost base of the beneficiary’s interest in the trust. If the cost base is reduced to nil, a capital gain may arise in respect of the beneficiary’s interest in the trust. This capital gain may qualify for the CGT discount (after applying any capital losses) if the interest in the trust has been owned by the beneficiary for at least 12 months.
If a beneficiary’s interest in a trust is not fixed (for example, the trust is a discretionary trust) there are no CGT consequences for the beneficiary.