ATO Interpretative Decision

ATO ID 2005/18 (Withdrawn)

Income tax

• This ATO ID has been withdrawn as the ATO view on this matter now appears in TR 2005/D14
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Will the anti-overlap rule in section 118-20 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to reduce a capital gain made by a taxpayer in respect of their interest in a trust as a result of CGT event E7 happening, if a capital gain the trustee made from a trust asset as a result of that event is effectively included in the beneficiary's assessable income under section 97 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision

Yes. The anti-overlap rule in section 118-20 of the ITAA 1997 will apply to reduce the capital gain made by the beneficiary from CGT event E7 happening, to the extent that the capital gain the trustee made from that event has effectively been included in the beneficiary's assessable income under section 97 of the ITAA 1936. It does not matter that subsection 115-215(6) of the ITAA 1997 provides a deduction for the amount included in the beneficiary's assessable income under section 97 of the ITAA 1936.

Facts

The taxpayer incurred expenditure to acquire an interest in the capital of a trust after 20 September 1985.

Subsequently, the trustee purchased a block of land.

In the 2004 income year, the trustee transferred the property to the taxpayer in satisfaction of their interest in the trust.

The trustee and the taxpayer each made a capital gain from CGT event E7 happening as a result of the disposal of the property by the trustee.

The capital gain made by the trustee was included in the trust's net income for the 2004 income year and distributed to the taxpayer as beneficiary of the trust.

The trust also earned interest income in the 2004 income year. The taxpayer was presently entitled to the income of the trust for that year.

Reasons for Decision

CGT event E7 in section 104-85 of the ITAA 1997 happens if the trustee of a trust disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest, or part of it, in the trust capital. When CGT event E7 happens, there may be consequences for both the trustee and beneficiary of a trust.

The trustee will make a capital gain from CGT event E7 if the market value of the trust asset is more than its cost base at the time it is disposed of. The trustee will make a capital loss if that market value is less than the asset's reduced cost base (subsection 104-85(3) of the ITAA 1997).

The beneficiary will make a capital gain if the market value of the trust asset (at the time of the disposal) is more than the cost base of the beneficiary's trust interest, or the part of it, being satisfied. The beneficiary makes a capital loss if that market value is less than the reduced cost base of that interest: subsection 104-85(5) of the ITAA 1997.

In this case, both the trustee and the taxpayer have made a capital gain as a result of CGT event E7 happening.

In addition to the taxpayer making their own capital gain, an amount will be included in their assessable income under section 97 of the ITAA 1936 in respect of the capital gain made by the trustee. This is because the capital gain made by the trustee forms part of the net income of the trust estate (section 95 of the ITAA 1936). As the taxpayer is presently entitled to the income of the trust in the 2004 income year, the assessable income of the taxpayer will include their share of the net income of the trust estate: section 97 of the ITAA 1936.

Anti-overlap rule

The anti-overlap rule in section 118-20 of the ITAA 1997 provides that a capital gain you make from a CGT event is reduced if, because of the event, a provision (other than a CGT provision) includes an amount in your assessable income.

Section 118-20 of the ITAA 1997 applies in this case to reduce the taxpayer's capital gain by the amount of the trust capital gain included in their assessable income under section 97 of the ITAA 1936.

The anti-overlap rule is not precluded from applying merely because, as in this case, the CGT event has happened to two different parties (that is, the trustee and the beneficiary).

Interaction with the rules in Subdivision 115-C of the ITAA 1997

Essentially, Subdivision 115-C ensures that a share of a trust capital gain included in a beneficiary's assessable income under section 97 of the ITAA 1936 is also treated as a capital gain in the hands of the beneficiary. This enables the beneficiary to offset their capital losses and net capital losses against the amount, and to apply the CGT discount (if applicable) to the amount.

To that end, the amount included in the beneficiary's assessable income under section 97 of the ITAA 1936 is also treated as a capital gain made by the taxpayer: subsection 115-215(3) of the ITAA 1997. To ensure that this amount is not taxed twice in the hands of the beneficiary (that is, once under section 97 and once as a capital gain under subsection 115-215(3)) the beneficiary deducts from their assessable income an amount equal to the trust capital gain included in the taxpayer's assessable income under section 97 (subsection 115-215(6) of the ITAA 1997).

The fact that an amount equal to the amount included under section 97 of the ITAA 1997 is deducted from the beneficiary's assessable income does not prevent the anti-overlap rule in section 118-20 of the ITAA 1997 applying. For that rule to apply, an amount must be included in a taxpayer's assessable income under a provision other than a CGT provision. In this case, an amount was included under section 97 of the ITAA 1936. Therefore, the condition for applying the anti-overlap rule is satisfied. The fact that a deduction equal to that amount was also allowed does not change that. Deductions are subtracted from assessable income for the purpose of determining taxable income (section 4-15 of the ITAA 1997). They do not alter the amount included in assessable income.

Further, a beneficiary's own capital gain is not reduced by the amount treated as their capital gain under section 115-215 of the ITAA 1997. That amount is not an amount included in assessable income under a non-CGT provision, and therefore, does not satisfy the primary condition in the anti-overlap rule in section 118-20 of the ITAA 1997.

Conclusion

Therefore, any capital gain the taxpayer made from their trust interest as a result of CGT event E7 happening can be reduced by the amount included in their assessable income under section 97 of the ITAA 1936 that represents the capital gain made by the trustee under CGT event E7.

Year of income:  Year ended 30 June 2004

Legislative References:
Income Tax Assessment Act 1936
   section 95
   section 97

Related ATO Interpretative Decisions
ATO ID 2003/39
ATO ID 2003/1116

Keywords
capital gains
capital gains tax
CGT event E5-beneficiary becoming entitled to a trust asset
CGT events
CGT events E1-E9 - trusts
trusts

Business Line:  Losses and Capital Gains Tax Centre of Expertise

Date of publication:  14 January 2005

ISSN: 1445-2782