1013105349907 | Legal database

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Edited version of your written advice

Authorisation Number: 1013105349907

Date of advice: 19 October 2016

Ruling

Subject: Capital Gains Tax

Question 1

Will a cash payment to a unit holder in respect of a distribution of corpus which has accreted from funds received from a XXX Scheme rental subsidy give rise to a capital gain or a reduction of cost base under Capital Gains Event E4 under section 104-70 of the Income Tax Assessment Act 1997?

Answer

No.

Question 2

Can you disregard a reduction in the cost base (in trust units held by unit holders) and the capital gain that will arise under event E4 under section 104-70 of the Income Tax Assessment Act 1997 as a result of a cash payment to unit holders in respect of a distribution of corpus which has accreted from the funds received as a result of a refund arising from the claim of the XXX Scheme Refundable Tax Offset claimed by the trustee of the trust?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

The Scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Unit Trust was established by Deed in 200X.

The Unit Trust is a property Trust approved by the Government to provide rental properties throughout a state in Australia under the XXX Scheme 1.

The Unit Trust's leased properties comply with the requirements under the XXX Scheme and as a result receive the following incentives each year:

● A rental subsidy; and

● A Refundable Tax Offset (RTO).

The net XXX Scheme rental subsidy and the RTO will not represent income of the trust pursuant to the Deed and as such will be an accretion to capital.

The Unit Trust receives a RTO certificate from a relevant agency each year which contains the amount of the RTO which the Unit Trust is entitled to claim in their tax return.

The Unit Trust is considering a distribution of capital; this capital distribution would include the net XXX Scheme rental subsidy and cash received by the trustee in relation to the RTO.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-70

Income Tax Assessment Act 1997 section 104-71

Income Tax Assessment Act 1997 section 118-37

Income Tax Assessment Act 1997 section 380-15

Income Tax Assessment Act 1997 section 380-20

Reasons for decision

A payment by a trustee of a trust in respect of a beneficiary's unit (except for Capital Gains Tax Event (CGT) event A1, C2, E1, E2, E6 or E7 happening in relation to it), will give rise to a CGT event E4 under section 104-70 of the Income Tax Assessment Act 1997 (ITAA 1997) where some or all of the payment (the non-assessable part) is not included in the beneficiary's assessable income. In working out the non-assessable part, any part of the payment that is non-assessable non-exempt (NANE) income is to be disregarded pursuant to paragraph 104-71(1)(a) of the ITAA 1997.

Under section 380-35 of the ITAA 1997 payments made to a taxpayer, whether directly or indirectly, by a State Government in relation to XXX Scheme is NANE income. Any distribution by the Unit Trust to the unitholders that is attributable to the State Government XXX Scheme contribution is considered to be a payment made indirectly to the unitholders by the State Government in relation to their participation in XXX Scheme and therefore is NANE income. Consequently, that distribution will be disregarded for the purposes of determining the non-assessable part under section 104-70 of the ITAA 1997 (paragraph 104-71(1)(a)) of the ITAA 1997. As a consequence, CGT event E4 will not occur and the distribution by the Unit Trust of an amount attributable to the State Government contribution will not reduce the cost base of the beneficiaries' units in the Unit Trust.

This treatment is consistent with the policy set out in the Explanatory Memorandum to the XXX Scheme Bill 2008 to ensure that there are no capital gains tax consequences from the receipt of incentives or other benefits under the XXX Scheme which would reduce or remove the benefit that the incentives are intended to provide.

Section 380-15 of the ITAA 1997 provides for refundable tax offset claims by entities which are indirect recipients of the XXX Scheme rent derived from rental dwellings to which a certificate relates. The rationale is that an entity can claim its share of the offset consistent with its share of rental income from its participation in the XXX Scheme through the trust.

The beneficiary of a trust to whom XXX Scheme rent flows indirectly in a year is not entitled to an offset if the trust has no net income for the year. In such a case the trustee may be able to claim a refund of the offset amount.

In your case as there is no net income in the Unit Trust and no rental income to distribute to the beneficiaries, the trustee has claimed the XXX Scheme refundable tax offset. Based on the facts you have provided you satisfied all the requirements under section 380-20 of the ITAA 1997 and were eligible to claim the offset.

The refundable tax offset cannot be included in trust income and as such will be an accretion to the corpus of the Unit Trust. A payment by a trustee of a trust in respect of a beneficiary's unit (except for CGT event A1, C2, E1, E2, E6 or E7 happening in relation to it), will give rise to a CGT event E4 under section 104-70 of the ITAA 1997 where some or all of the payment (the non-assessable part) is not included in the beneficiary's assessable income. In working out the non-assessable part, any part of the payment that is NANE income is to be disregarded pursuant to paragraph 104-71(1)(a) of the ITAA 1997. The refundable tax offset is not excluded under section 104-71 of the ITAA 1997 and therefore a distribution of the refundable tax offset to beneficiaries would give rise to CGT event E4. However in this case subsection 118-37(1)(h) of the ITAA 1997 will apply to disregard any capital gain that will arise now and in the future which has occurred as a result of the XXX Scheme refundable tax offset.

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