• Non-assessable payments from a trust

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    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). If certain amounts exceed your cost base, you may also make a capital gain equal to that excess in the year it is paid to you.

    Note

    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 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.

    For more information about demergers, see chapter 5

    Capital loss

    You cannot make a capital loss from a non-assessable payment.

    The cost base adjustments you need to make (if any) depend on the category of non-assessable payment you receive.

    Non-assessable payments may be shown on your distribution statement as:

    • tax-exempted amounts - generally made up of exempt income and non-assessable non-exempt income of the trust, amounts on which the trust has already paid tax or income you had to repay to the trust
    • tax-free amounts - where certain tax concessions allowed to the trust mean it can pay greater distributions to its unit holders
    • tax-deferred amounts - other non-assessable payments, including indexation allowed to the trust on its capital gains and accounting differences in income, or
    • CGT-concession amounts - the trust's CGT discount and capital losses components of any actual distribution.

    Tax-exempted amounts do not affect your cost base and reduced cost base. However, if your statement shows any tax-deferred or tax-free amounts, you adjust the cost base and reduced cost base as follows:

    • cost base - deduct the tax-deferred amounts from the cost base
    • reduced cost base - deduct both the tax-deferred amounts and the tax-free amounts.

    Before 1 July 2001, a payment of an amount associated with building allowances was treated as a tax-free amount. Payments on or after that date are treated as tax-deferred amounts.

    A CGT-concession amount received before 1 July 2001 was treated in the same way as a tax-deferred amount. However, from this date, CGT-concession amounts no longer require a cost base and reduced cost base adjustment.

    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 (see chapter 2 for more information).

    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 the Tax Office 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: Bob has received a non-assessable amount

    Bob owns units in OZ Investments Fund which distributed income to him for the year ending 30 June 2006. The fund gave him a statement showing his distribution included the following capital gains:

    • $100 calculated using the discount method (grossed-up amount $200)
    • $75 calculated using the indexation method, and
    • $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:

    • $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 2005-06 income year and no unapplied net capital losses from earlier years.

    Bob follows these steps to work out the amounts to show on his tax return.

    As Bob has a capital gain which the fund reduced under the CGT discount of 50% ($100), he includes the grossed-up amount ($200) in his total current year capital gains.

    Bob adds the grossed-up amount to his 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 the amount of capital gain included in his distribution from the fund ($203).

    Bob completes item on his tax return (supplementary section) as follows:

    17 Capital gains

    You must also print X in the YES box at G if you received a distribution of a capital gain from a trust

    Did you have a Capital gains tax event during
    the year?

    G    NO   YES  X

    Net capital gain

    A         203

    Total current year capital gains

    H      303

    Net capital losses carried forward to later income years

    V

    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.

    Bob deducts the tax-deferred amount from both the cost base and reduced cost base of his units as follows:

    Cost base

    $1,200

    less tax-deferred amount

    $105

    New cost base

    $1,095

    Reduced cost base

    $1,050

    less tax-deferred amount

    $105

    New reduced cost base

    $945

    Example: Ilena's capital loss is greater than her non-discounted capital gain

    Ilena invested in XYZ Managed Fund. The fund made a distribution to Ilena for the year ending 30 June 2006 and gave her a statement that shows her distribution included:

    • $65 discounted capital gain, and
    • $90 non-discounted capital gain.
     

    The statement shows Ilena's distribution also included:

    • $30 tax-deferred amount, and
    • $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 fund distribution as if she made the capital gain. To complete her tax return, Ilena must identify the capital gain component of her fund distribution and work out her net capital gain.

    Ilena follows these steps to work out the amount to show at H item 17 on her tax return (supplementary section).

    As Ilena has a $65 capital gain which the fund reduced by the CGT discount of 50%, she must gross up the capital gain. She does this by multiplying the amount of the discounted capital gain by two:

    $65 x 2 = $130

    Ilena adds her grossed-up and non-discounted capital gains to work out her total current year capital gains:

    $130 x $90 = $220

    She shows her total current year capital gains ($220) at H item 17 on her tax return (supplementary section).

    After Ilena has grossed up the discounted capital gain received from the fund, 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:

    1

    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)

    2

    subtracts her remaining capital losses after step 1 ($10) from her discounted capital gains ($130).

    $130- $10 = $120 (discounted capital gains)

    3

    applies the CGT discount to her remaining discounted capital gains:

    ($120 x $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 17 on her tax return (supplementary section) follows:

    17 Capital gains

    You must also print X in the YES box at G if you received a distribution of a capital gain from a trust

    Did you have a Capital gains tax event during
    the year ?

    G    NO   YES  X

    Net capital gain

    A         60

    Total current year capital gains

    H      220

    Net capital losses carried forward to later income years

    V

    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:

    Cost base

    $5,000

    less tax-deferred amount

    $30

    New cost base

    $4,970

    Reduced cost base

    $4,700

    less (tax-deferred amount + tax-free amount)
    ($30 + $35)

    $65

    New reduced cost base

    $4,635

    Last modified: 06 Oct 2009QC 18504