Edited version of private advice

Authorisation Number: 1051796056871

Date of advice: 15 January 2021

Ruling

Subject: Trust - capital gain

Question

Is Individual A presently or specifically entitled to any of the capital gain derived by the Trust such that they are required to include any of the capital gain in their assessable income for the year ended 30 June 20XX?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

On XX/XX/XXXX Individual A established the Trust in Country B.

The Trust acquired an investment property in Country B.

Individual A is the sole trustee of the Trust and has been an Australian resident for many years.

The investment property was negatively geared.

The investment property was sold during the 20XX-XX income year.

A gain was made on the sale.

The trustee resolved that the capital gain was to be allocated to Individual A.

Clause Z of the Trust Deed placed restrictions on the trustee's powers in certain circumstances.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 95

Income Tax Assessment Act 1936 Section 97

Income Tax Assessment Act 1936 Section 99A

Income Tax Assessment Act 1936 Paragraph 251S(1)(c)

Income Tax Assessment Act 1997 Section 115-215

Income Tax Assessment Act 1997 Subsection 115-222(4)

Income Tax Assessment Act 1997 Section 115-227

Income Tax Assessment Act 1997 Section 115-228

Reasons for decision

An Australian resident who is presently entitled to a share of the income of a trust and is not under a legal disability is required to include their share of the net income of the trust under section 97 of the Income Tax Assessment Act 1936 (ITAA 1936).

The operation of section 97 of the ITAA 1936 may be modified by Division 115-C of the Income Tax Assessment Act 1997 (ITAA 1997). This Division allows for the streaming of capital gains by trusts to beneficiaries. Where a capital gain is included in a taxpayer's assessable income under this Division, the capital gain is not also included under section 97 of the ITAA 1936, that is, a beneficiary is not taxed twice on the capital gain.

For Division 115-C of the ITAA 1997 to apply, the taxpayer must be specifically entitled to an amount of a capital gain made by the trust.

In the present circumstances, the trustee did not have the power under the Trust Deed to distribute the income of the trust, or effectively stream the capital gain, due to the operation of clause Z of the Trust Deed.

As a result of the trustee's inability to effectively distribute the income or stream the capital gain of the Trust, the purported recipient of the distribution (being Individual A) was not presently entitled to a share of income of the Trust or specifically entitled to an amount of capital gain made by the Trust. Individual A is therefore not required to include in their assessable income a share of the net income of the Trust pursuant to section 97 of the ITAA 1936 or a capital gain made by the Trust pursuant to Division 115-C of the ITAA 1997.

Additional information

The Trust was a resident trust for the 20XX-XX income year as its trustee was a resident during that income year (subsection 95(2) of the ITAA 1936).

As no beneficiary was presently entitled to the capital gain, the trustee is assessed and liable to pay tax on it pursuant to subsection 99A(4) of the ITAA 1936. The applicable rate of tax payable by a trustee assessed under section 99A of the ITAA 1936 is 45%. Medicare levy also applies (paragraph 251S(1)(c) of the ITAA 1936).

Also, where a trustee is assessed under section 99A of the ITAA 1997, the benefit of the CGT 50% discount is removed by subsection 115-222(4) of the ITAA 1997.

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