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Ruling

Subject: Capital Gains Tax - non-assessable distribution

Question

Is a taxpayer required to reduce the cost base of units which it owns in a unit trust as a result of a non-assessable distribution resulting from the disposal by the unit trust of an asset acquired prior to 20 September 1985?

Answer

Yes.

This ruling applies for the following periods:

1 July 2009 to 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

The taxpayer is a discretionary trust which owns units in a fixed unit trust. Those units were acquired for monetary consideration after 19 September 1985.

During the year, the taxpayer received a distribution from the unit trust in accordance with the taxpayer's interest. Part of the distribution was in respect of a capital gain derived from the sale of an asset acquired by the unit trust prior to 20 September 1985.

The capital gain was not included in the assessable income of the unit trust and it was not included in the taxpayer's assessable income. The relevant units were acquired by the taxpayer in two separate parcels. The proportion of the distribution that applies to the units in parcel one is less than the cost base of those units. The proportion of the distribution that applies to the units in parcel two is more than the cost base of those units. The total distribution in respect of both parcels is less than the total cost base.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-70

Reasons for decision

Unless otherwise stated, all legislative references in the following Reasons for Decision are to the Income Tax Assessment Act 1997.

Detailed reasoning

CGT event E4 in section 104-70 happens, with certain exceptions, when the trustee of a trust makes a non-assessable payment to a beneficiary in respect of the beneficiary's units or interest in the trust and some or all of the payment is not assessable income.

In the present case, the payment by the unit trust is not assessable to it as the asset of which it disposed was acquired prior to 20 September 1985. If a profit made by a unit trust is not assessable, any part of that profit distributed to a beneficiary will also generally not be assessable (that includes profit from the sale of pre-CGT assets). In such a case, CGT event E4 occurs.

The effect of CGT event E4 is to reduce the cost base of the beneficiary's units or interest in the trust. Those adjustments will affect the amount of any capital gain or capital loss which is ultimately made in respect of the unit or interest.

In certain circumstances, event E4 will result in a capital gain. However, it cannot give rise to a capital loss.

Sub-section 104-70(4) states that a capital gain is made if the sum of the non-assessable payments made by the trustee in respect of the unit or interest is more than its cost base. In other words, if the occurrence of an E4 event leads to the cost base of the interest being reduced to nil, a capital gain may arise as a consequence of any further payments. Note that the non-assessable payments may be over a number of years and once the cost base is reduced to zero any excess is a capital gain in the year the excess arises, as stated in Taxation Determination TD 93/171.

In the present case, the distribution affects two different parcels of units and, therefore, two distinct interests in the unit trust. In the case of one of those parcels, the relevant portion of the distribution is less than the cost base of the units. In such a case, the cost base will be reduced to the extent of the distribution.

In respect of the second parcel, the distribution exceeds the cost base. In that case, the cost base of those units will be reduced to nil and there will be a capital gain in the year of the distribution. The capital gain will be the amount by which the distribution exceeds the relevant cost base. This gain may be reduced by applying the CGT discount and the small business 50% reduction if the relevant qualifying conditions are satisfied.

Note: The ruling application specified that the asset in question was acquired before 20 September 1985 and is not assessable. Consequently, no consideration has been given in the ruling as to whether there has been a change in the majority underlying interests for the purposes of Division 149.