ATO Interpretative Decision
ATO ID 2009/112
Income TaxCapital Gains Tax: beneficiary's share of trust net income includes trust capital gain - deduction for beneficiary's contribution to a complying superannuation fund
FOI status: may be released for FOI purposes
Note: This ATO ID contains a view in respect of subsection 115-215(6) of the Income Tax Assessment Act 1997 which has been repealed. Except in the case of certain early balancing trusts and managed investment trusts, its repeal takes effect for the 2010-11 and later income years. Accordingly, the issue in this ATO ID will not generally arise.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Does the deduction of an amount by a taxpayer under subsection 115-215(6) of the Income Tax Assessment Act 1997 (ITAA 1997) reduce the taxpayer's assessable income for the purposes of applying the '10% test' in subsection 290-160(2) of the ITAA 1997?
No. The deduction provided by subsection 115-215(6) of the ITAA 1997 is relevant to the calculation of a taxpayer's 'taxable income' not their 'assessable income' and, therefore, does not affect the operation of the 10% test in subsection 290-160(2) of the ITAA 1997.
An individual (aged between 18 and 75) made a personal superannuation contribution to a complying superannuation fund.
The individual gave a valid notice to the fund of an intention to claim a deduction for the contribution and received an acknowledgement from the fund.
In the relevant income year, the individual derived $20,000 as an employee and did not receive any fringe benefits.
The individual was also a beneficiary of a trust and was presently entitled to 50% of the income of the trust. The net income of the trust was $200,000, of which $180,000 was attributable to a net capital gain calculated after application of the CGT 50% discount. This gain did not qualify for any of the small business CGT concessions in Division 152 of the ITAA 1997.
The individual had no capital losses for the income year and no unapplied net capital losses from earlier years.
The individual sought to deduct the superannuation contribution.
Reasons for Decision
Section 290-150 of the ITAA 1997 provides that a taxpayer can deduct a contribution to a superannuation fund which was made for the purpose of providing them with superannuation benefits if certain conditions are satisfied. In the relevant income year, those conditions are that:
- the fund is a complying superannuation fund for the income year in which the contribution is made
- the taxpayer satisfies age related conditions
- the taxpayer has given a valid notice of intent to claim the deduction to the trustee of the superannuation fund in the approved form by the required time and received an acknowledgement from the trustee, and
- the taxpayer's assessable income from employment activities is less than 10% of their combined assessable income and reportable fringe benefits (10% test).
The issue in this case is whether the individual satisfies the 10% test.
Assessable income includes ordinary income (section 6-5 of the ITAA 1997) and statutory income (section 6-10 of the ITAA 1997). Ordinary income is income according to ordinary concepts. The $20,000 which the individual received from employment is ordinary income.
Statutory income is an amount that is not ordinary income but is included in assessable income by a provision about assessable income - for example, section 97 of the Income Tax Assessment Act 1936 (ITAA 1936). That section provides that a taxpayer who is not under a legal disability and who is presently entitled to a share of the income of a trust estate must include in their assessable income that share of the net income of the trust calculated under section 95 of the ITAA 1936.
The individual was presently entitled to 50% of the income of a trust and thus had $100,000 of statutory income under section 97 of the ITAA 1936 (that is, 50% of the trust net income).
Where, as here, a trust's net income includes a net capital gain, Subdivision 115-C of the ITAA 1997 treats a beneficiary's share of the net income attributable to that gain as a capital gain which the beneficiary must include in the calculation of their own net capital gain.
Because the trust applied the CGT 50% discount, the individual must 'gross-up' the gain and apply their own capital losses and appropriate discount percentage when working out their net capital gain. By operation of paragraph 115-215(3)(b) and section 102-5 of the ITAA 1997, the individual had a net capital gain of $90,000. The net capital gain is statutory income and included in the individual's assessable income under section 102-5 of the ITAA 1997.
Subsection 115-215(6) of the ITAA 1997 ensures that a beneficiary's share of a trust net capital gain is not taxed both under section 97 of the ITAA 1936 and as part of the beneficiary's net capital gain worked out taking account of the direction in subsection 115-215(3) of the ITAA 1997. However, this is achieved by way of deduction. And section 4-15 of the ITAA 1997 makes it clear that deductions are taken from assessable income to arrive at the amount of a taxpayer's taxable income (but deductions do not change the amount of a taxpayer's assessable income).
In this case the individual's income as an employee was 9.52% of their assessable income for the relevant year [$20,000/ ($20,000 + $100,000 + $90,000)]. Accordingly, the individual's income from employment activities satisfied the 10% test and they were entitled to deduct their superannuation contribution.Date of decision: 14 October 2009
Year of income: Income year ended 30 June 2010
Income Tax Assessment Act 1997
Deductions & expenses
Net capital gain