Trusts often make non-assessable payments to beneficiaries.
If a profit made by the trust is not assessable, any part of that profit distributed to a beneficiary will also be non-assessable in most cases, for example, a share of a profit made on the sale of property acquired by the trust before 20 September 1985.
However, if you receive non-assessable payments from a trust, you may need to make cost base adjustments to your units or trust interest. Those adjustments will affect the amount of any capital gain or capital loss you make on the unit or interest, for example, when you sell it.
Non-assessable payments may be made over a number of years. If non-assessable payments exceed your cost base, you may also make a capital gain equal to the excess in the year the excess is paid to you.
Non-assessable payments from a managed fund to a unit holder are common and may be shown on your statement from the fund as:
- tax-free amounts
- CGT-concession amounts
- tax-exempted amounts
- tax-deferred amounts.
If you are a beneficiary in a trust which is subject to the trust provisions relating to 'streaming' of capital gains and franked distributions, even if you are distributed an amount that is described as the CGT concession amount, you may be taken to have made a capital gain. You will need to include this in your own net capital gain calculation.
You may need to adjust the cost base and reduced cost base of your units depending on the kind of non-assessable payment you received. If you hold an interest in an AMIT, the adjustment may either increase or decrease your cost base and reduced cost base. For more information, see Cost-base adjustments for AMIT members.
Your statement of distribution or advice should show amounts and other information relevant to your cost base or reduced cost base.
Tax-free amounts relate to certain tax concessions received by the fund which enable it to pay greater distributions to its unit holders. If your statement shows any tax-free amounts, you adjust the reduced cost base (but not your cost base) of your units by these amounts. Payments of amounts associated with building allowances which were made before 1 July 2001 were treated as tax-free amounts.
CGT-concession amounts relate to the CGT discount component of any actual distribution. Such amounts do not affect your cost base and reduced cost base if they were received after 30 June 2001. A CGT-concession amount received before 1 July 2001 is taken off the cost base and reduced cost base.
Tax-exempted amounts are generally made up of:
- exempt income of the fund
- amounts on which the fund has already paid tax, or
- income you had to repay to the fund.
Such amounts do not affect your cost base and reduced cost base.
Tax-deferred amounts are other non-assessable amounts, including indexation received by the fund on its capital gains and accounting differences in income. You adjust the cost base and reduced cost base of your units by these amounts. Payments associated with building allowances which are made on or after 1 July 2001 are treated as tax-deferred amounts.
If the tax-deferred amount is greater than the cost base of your units, you include the excess as a capital gain. You can use the indexation method if you bought your units before 11.45am (by legal time in the ACT) on 21 September 1999.
You cannot make a capital loss from a non-assessable payment.
As a result of recent stapling arrangements, some investors in managed funds have received units which have a very low cost base. The payment of certain non-assessable amounts in excess of the cost base of the units will result in these investors making a capital gain.
Non-assessable payments under a demerger
If you receive a non-assessable payment under an eligible demerger, you do not deduct the payment from the cost base and the reduced cost base of your units or trust interest. Instead, you adjust your cost base and reduced cost base according to the demerger rules.
You may make a capital gain on the non-assessable payment if it exceeds the cost base of your original unit or trust interest, although you will be able to choose a CGT rollover.
An eligible demerger is one that happens on or after 1 July 2002 and satisfies certain tests. The trust making the non-assessable payment will normally advise unit or trust interest holders if this is the case.
Cost base adjustments
Generally, you make any adjustment to the cost base and reduced cost base of your unit or trust interest at the end of the income year. However, if some other CGT event happens to the unit or trust interest during the year (for example, you sell your units), you must adjust the cost base and reduced cost base just before the time of that CGT event. The amount of the adjustment is based on the amount of non-assessable payments paid to you up to the date of sale. You use the adjusted cost base and reduced cost base to work out your capital gain or capital loss.
The cost base and reduced cost base adjustments are more complex if you deducted capital losses from a grossed-up capital gain where a capital gain made by the trust was reduced by the small business 50% active asset reduction. If this applies to you, you may need to seek advice from us on how to make the adjustments.
If the tax-deferred amount is greater than the cost base of your unit or trust interest, you include the excess as a capital gain. You can use the indexation method if you bought your units or trust interest before 11.45am (by legal time in the ACT) on 21 September 1999. However, if you do so, you cannot use the discount method to work out your capital gain when you later sell the units or trust interest.
Example 20: Bob has received a non-assessable amount
Bob owns units in OZ Investments Fund (a managed fund that is not an AMIT and has not elected to apply the 2011 changes to the rules relating to capital gains made by trusts) which distributed income to him for the 2018–19 income year. The fund gave him a statement showing his distribution meant that his share of the trust’s net capital gain included:
- $100 calculated using the discount method (grossed-up amount $200)
- $75 calculated using the indexation method
- $28 calculated using the 'other' method.
These capital gains add up to $203.
The statement shows Bob’s distribution did not include a tax-free amount, but it did include a $105 tax-deferred amount.
From his records, Bob knows that the cost base and reduced cost base of his units are $1,200 and $1,050 respectively.
Bob has no other capital gains or capital losses for the 2018–19 income year and no unapplied net capital losses from earlier years.
The following steps show how Bob works out the amounts to write on his tax return.
As Bob has a share of a capital gain which the fund reduced under the CGT discount of 50% (so that his share was $100), he includes the grossed-up amount of his share ($200) in his total current year capital gains.
Bob adds the grossed-up amount to his share of the trust’s capital gains calculated using the indexation method and 'other' method to work out his total current year capital gains:
$200 + $75 + $28 = $303
As Bob has no other capital gains or capital losses, and he must use the discount method for the capital gains calculated using the discount method from the trust, his net capital gain is equal to his share of the trust’s net capital gain for tax purposes ($203).
Bob completes item 18 on his tax return (supplementary section) as follows:
Bob must print X in the No box at M and leave the code blank because he did not apply an exemption or rollover.
Records Bob needs to keep
The tax-deferred amount Bob received is not included in his income or his capital gains, but it affects the cost base and reduced cost base of his units in OZ Investments Fund for future income years.
less tax-deferred amount
New cost base
Reduced cost base
less tax-deferred amount
New reduced cost base
End of example
Example 21: Ilena’s capital loss is greater than her non-discounted capital gain
Ilena invested in XYZ Managed Fund (a managed fund that is not an AMIT and has not elected to apply the 2011 changes to the rules relating to capital gains made by trusts). The fund made a distribution to Ilena for the year ending 30 June 2019 and gave her a statement that shows her distribution meant that her share of the trust’s net capital gain included:
- $65 discounted capital gain
- $90 non-discounted capital gain.
The statement shows Ilena’s distribution also included:
- $30 tax-deferred amount
- $35 tax-free amount.
Ilena has no other capital gains, but made a capital loss of $100 on some shares she sold during the year. Ilena has no unapplied net capital losses from earlier years.
From her records, Ilena knows the cost base and reduced cost base of her units are $5,000 and $4,700 respectively.
Ilena has to treat the capital gain component of her share of the fund’s net income for tax purposes as if she made the capital gain. To complete her tax return, Ilena must identify this capital gain component and work out her net capital gain.
The following steps show how Ilena works out the amount to write at H item 18 on her tax return (supplementary section).
As Ilena has a share of a capital gain which the fund reduced by the CGT discount of 50% (her discounted share being $65), she must gross up her share of this capital gain. She does this by multiplying the amount of her share of the discounted capital gain by two:
$65 × 2 = $130
Ilena adds her share of the trust’s grossed-up and non-discounted capital gains to work out her total current year capital gains:
$130 + $90 = $220
She writes her total current year capital gains ($220) at H item 18 on her tax return (supplementary section).
After Ilena has grossed-up her share of the fund’s discounted capital gain, she subtracts her capital losses from her capital gains.
Ilena can choose which capital gains she subtracts the capital losses from first. In her case, she gets the better result if she:
- subtracts as much as possible of her capital losses (which were $100) from her non-discounted capital gains ($90).
$90 − $90 = $0 (non-discounted capital gains)
- subtracts her remaining capital losses after step 1 ($10) from her discounted capital gains ($130).
$130 − $10 = $120 (discounted capital gains)
- applies the CGT discount to her remaining discounted capital gains:
($120 × 50%) = $60 (discounted capital gains)
Finally, Ilena adds up the capital gains remaining to arrive at her net capital gain:
$0 (non-discounted) + $60 (discounted) = $60 net capital gain.
Ilena completes item 18 on her tax return (supplementary section) as follows:
Ilena must print X in the No box at M and leave the code blank. The trust applied the exemption or rollover and will need to report that on its trust return.
Records Ilena needs to keep
The tax-deferred and tax-free amounts Ilena received are not included in her income or her capital gain, but the tax-deferred amount affects the cost base and reduced cost base of her units in XYZ Managed Fund for future income years. The tax-free amount affects her reduced cost base.
Ilena reduces the cost base and reduced cost base of her units as follows:
less tax-deferred amount
New cost base
Reduced cost base
less (tax-deferred amount + tax-free amount)
New reduced cost base
End of example
If any non-assessable amounts from an AMIT are attributed to you, these may affect the cost base of your units in the AMIT.
Non-assessable payments are any part of the profit of the trust that is non-assessable and are not included in your assessable income. Tax-free and tax-deferred amounts may reduce the cost base of your units, while tax-exempt amounts do not affect the cost base; see Trust non-assessable payments (CGT event E4).
Under the new tax system for managed investment trusts, the cost base of your units can be adjusted both upwards and downwards (upwards adjustments were not previously allowed).
Your statement of distribution or advice or AMIT Member Annual statement (AMMA) should show amounts and other information relevant to your cost base or reduced cost base.
The AMIT will calculate a cost base net amount. The cost base net amount is the balance of your cost base reduction amount and your cost base increase amount.
Example 21A: AMIT cost base net adjustment
Miriam owns units in the Exponential Growth Fund, which has elected in to the new tax system for managed investment trusts in 2018–19 and is therefore an AMIT.
The fund attributes $13 per unit to Miriam for 2018–19 but pays a cash amount of $3 per unit. The balance of $10 is retained by Exponential Growth Fund for reinvestment, rather than paid as a cash distribution. Miriam includes the $13 attributed amount in her assessable income as 'Share of net income from trusts' at 13 Partnerships and trusts.
Cost base consequences
The $13 attributed to Miriam is added to her cost base of $55, while the actual payment of $3 is taken away from her cost base. In this way, the cost base increase is netted off against the cost base reduction, resulting in a cost base net increase of $10 per unit. The cost base increase and cost base reduction are shown in Miriam's AMMA statement, along with a cost base net amount of $10.
The $10 cost base net amount is not included in Miriam's assessable income or capital gains because it represents amounts that have already been taxed to her on attribution, but is used to increase the cost base of her units in Exponential Growth Fund for future years. Miriam will need to include it in her cost base calculations when she eventually sells her units in the fund, to ensure that the undistributed amount attributed to her is not double taxed as a capital gain.
Cost base per unit
plus taxable income attributed in 2018–19
less cash dividend for 2018–19
New cost base per unit
End of example
The amounts attributed to you to be included in your assessable income, as well as any non-assessable non-exempt income related to your CGT asset, are added to the cost base amount of your units in the AMIT. Cash payments you receive in relation to your units are taken away from their cost base. Any reductions and increases are netted off against each other to arrive at your cost base net amount.
Any excess cost base net amount is used to reduce your unit’s cost base. If the excess is greater than your cost base it will reduce your cost base to nil. Any remaining excess will result in a capital gain. If the excess is less than your cost base your cost base amount will be decreased, which may result in a greater capital gain or reduced capital loss on the disposal of your membership interests in the AMIT.
Any shortfall in the cost base net amount is used to increase your asset’s cost base and reduced cost base. This may result in a reduced capital gain or increased capital loss on disposal of your assets.
- Law Companion Ruling LCR 2015/11 Attribution Managed Investment Trusts: annual cost base adjustments for units in an AMIT and associated transitional rules