Personal investors guide to capital gains tax 2003

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Part C: Distributions from managed funds

Chapter C1 How to work out your capital gains tax for a managed fund distribution

Note: new terms

Some terms in this section may be new to you. They have been printed in red the first time they are used (mostly in earlier sections) and are explained in Explanation of terms .

Reminder

If your managed fund distribution (as advised by the fund) includes a capital gain amount, you show this amount at item 17 Capital gains . You do not include capital gains at item 12-Partnerships and trusts .

Examples of managed funds include property trusts, share trusts, equity trusts, growth trusts, imputation trusts and balanced trusts.

Distributions from managed funds can include two types of amounts that affect your CGT obligation:

• capital gains, and
• non-assessable payments.

The following steps in chapter C1 show you how to record a capital gain distributed from a managed fund. Chapter C2 covers non-assessable amounts which mostly affect the cost base of units but can create a capital gain.

STEP 1 Work out the capital gain you have received from the managed fund

You need to know whether you have received any capital gain in your distribution-to find out, check the statement from your managed fund.

This statement should also show which method the fund has used to calculate the gain-the indexation, discount or 'other' method. You must use the same method(s) as the fund to calculate your capital gain. (These methods are explained in part A, part B and Explanation of terms at the back of this guide.)

Fund managers may use different terms to describe the calculation methods and other terms used in this guide. For example, they may refer to capital gains calculated using the indexation method and 'other method' as non-discount gains.

STEP 2 Gross up any discounted capital gain you have received

If the fund has applied the CGT discount to your distribution, this is known as a discounted capital gain .

You need to gross up any discounted capital gain distributed to you by multiplying the gain by two. This gross up amount is your capital gain from the fund. If the managed fund has shown the grossed-up amount of the discounted capital gain on your distribution statement, you can use that amount.

Example

• Tim received a distribution from a fund that included a discounted capital gain of $400. Tim's statement shows that the fund had used the discount method to calculate the gain.
• Tim grosses up the capital gain to $800 (that is, $400 x 2).

Note

• Generally a managed fund will not have qualified for the 50% small business CGT reduction. However if it did qualify for that concession (after you apply the CGT discount) multiply the gain by four.

STEP 3 Work out your total current year capital gains

Add up all the capital gains you received from funds (grossed up where necessary) together with any capital gains from other assets. Write the total of all of your capital gains for the current year at H item 17 .

If you have any capital losses, do not deduct them from the capital gains before showing the total amount at H .

Example

• Tim's fund also distributed a capital gain of $100 calculated using the other method. Tim shows $900 ($ 800 + $100) at H item 17 on his tax return.

STEP 4 Applying capital losses against capital gains

If you have no capital losses from assets you disposed of this year and no net capital loss from an earlier year that you were able to carry forward to this year, go to step 5.

If you had capital losses (including net capital losses from earlier years) deduct them from your capital gains (the amount you wrote at H ). You may do this in the order that gives you the greatest benefit.

Offsetting your losses

You will probably get the greatest benefit if you deduct capital losses from capital gains distributed from the fund in the following order:

1. capital gains calculated using the 'other' method
2. capital gains calculated using the indexation method, and then
3. capital gains calculated using the discount method.

If your capital losses (including net capital losses from earlier years) are greater than your capital gains, go to step 7 .

Example

• If Tim had a loss of $200 when he sold another CGT asset, he deducts his capital loss ($ 200) from his capital gain ($ 900) and arrives at $700.

  As he applied the loss first against the capital gain calculated using the 'other' method and then against the capital gain calculated using the discount method (after grossing it up), Tim can apply the CGT discount to the remaining $700.

Note

Losses from personal use assets and collectables

• Remember a net capital loss from collectables can only be used to reduce capital gains from collectables. Losses from personal use assets must be disregarded. Refer to the Guide to capital gains tax for more information.

STEP 5 Applying the CGT discount

If you have any remaining grossed up capital gains you can now apply the CGT discount-if applicable-and reduce them by 50%.

Remember, you cannot apply the CGT discount to capital gains distributed from the fund calculated using the indexation or 'other' method.

Example

• Tim has applied his capital losses (including net capital losses from earlier years) to his capital gain. He now reduces the amount remaining by 50%:

  $700 X 50% = $350

  Tim has a capital gain of $350.

STEP 6 Work out your net capital gain

Show at A item 17 the amount remaining after completing steps 1-5. This is your net capital gain for the year. Ignore step 7.

Example

• Tim shows $350 at A item 17 on his tax return.

STEP 7 Work out your carry-forward losses

If your capital losses (including net capital losses from earlier years) were greater than your capital gains, you were directed to this step from step 4.

If you have capital losses (including net capital losses from earlier years) remaining, you should show '0' (zero) at A .

At V show the amount by which your capital losses (including net capital losses from earlier years) are greater than your capital gains. You carry these capital losses forward to be applied against later year capital gains.

More information

For more information about CGT and managed fund distributions, get the publication Guide to capital gains tax .

Chapter C2 Non-assessable payments from a managed fund

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 (where certain tax concessions received by the fund mean it can pay greater distributions to its unit holders)
• CGT-concession amounts (the CGT discount component of any actual distribution)
• tax-exempted amounts (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), or
• tax-deferred amounts (other non-assessable amounts, including indexation received by the fund on its capital gains and accounting differences in income).

CGT-concession amounts received after 30 June 2001 and tax-exempted amounts do not affect your cost base or reduced cost base. However, if your statement shows any tax-deferred or tax-free amounts, you adjust the cost base and reduced cost base of your units for future purposes as follows:

• cost base-deduct the tax-deferred amount, or
• reduced cost base-deduct both the tax-deferred and tax-free 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.

A CGT-concession amount received before 1 July 2001 is taken off the cost base and reduced cost base.

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

Note

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

Chapter C3 Worked examples for managed fund distributions

The following worked examples take the steps explained in chapter C1 and put them into different scenarios to demonstrate how they work.

If you have received a distribution from a managed fund, you may be able to apply one or more of these examples to your circumstances to help you work out your CGT obligation for 2002-03 and complete item 17 on your tax return.

Example 1

• 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 2003. 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 2002-03 income year .

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 by 50% under the CGT discount method ($100), he includes the grossed-up amount ($200) in his total current year capital gain.

To work out his total current year capital gains Bob adds the grossed-up amount to his capital gains calculated using the indexation method and 'other' method:

$200 + $75 + $28 = $303

As Bob has no other capital gains or capital losses and he must use the discount method in relation to the discount gain 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 17 on his tax return 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                                                 203.00
Total current year capital gains		H                                                 303.00
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 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 2

• Ilena's capital loss is greater than her capital gains calculated under the indexation method and 'other' method.

  Ilena invested in XYZ Managed Fund. The fund makes a distribution to Ilena for the year ending 30 June 2003 and provides her with a statement that shows her distribution included:

• $65 discounted capital gain
• $50 capital gain calculated using the 'other' method, and
• $40 capital gain calculated using the indexation method.

• The statement shows Ilena's distribution also included:

• $30 tax-deferred amount, and
• $35 tax-free amount.

• Ilena has no other capital gain but made a capital loss of $100 when she sold some shares during the year.

From her records, Ilena knows the cost base of her units is $5,000 and their reduced cost base is $4,700.

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 amounts to show at item 17 on her tax return.

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

To work out her total current year capital gains Ilena adds her grossed-up capital gain to her capital gains calculated under the indexation method and 'other' method :

$130 + $50 +$ 40 = $220

She shows her total current year capital gains ($ 220) at H item 17 on her tax return, or at H item 9 if she uses the tax return for retirees.

Now Ilena subtracts her capital losses from her capital gains. Ilena can choose which capital gains she subtracts her capital losses from first. In her case, she will receive a better result if she:

1. subtracts as much as possible of her capital losses (which were $100) against her indexed and 'other' method capital gains. Her gains under these methods were $40 and $50 respectively, a total of $90, so she subtracts $90 of her capital losses against these capital gains.

$90 -$90 = $0 (indexed and 'other' method capital gains)

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

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

3. applies the CGT discount to her remaining discounted capital gains: ($ 120 50%) = $60 (discounted capital gains)

Reminder

• A CGT-concession amount is only taken off the cost base or reduced cost base if it was received BEFORE 1 July 2001.

Finally, Ilena adds up the capital gains remaining to arrive at her net capital gain:

$0 (indexed and 'other') + $60 (discounted) = $60 net capital gain

Ilena completes item 17 on her tax return 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                                                 60.00
Total current year capital gains		H                                                 220.00
Net capital losses carried forward to later income years		V                                                         0.00

• 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

ATO references:
NO NAT 4152