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Subject: Capital gains tax - trust distrib - specifically entitled beneficiaries - streaming

Question:

Can the trustees of the estate stream the estate's capital gains to the beneficiaries?

Answer:

Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

The deceased passed away before 20 September 1985.

The deceased's will provided that their spouse would have a life interest in the estate, and on their death, the residuary estate would be divided between the deceased's surviving children in equal parts as tenants in common. The will also provided that the trustees of the estate could purchase, set aside, or appropriate trust investments to be used to fund the life tenant's standard of living and the costs of their burial, with the balance to form part of the deceased's residuary estate.

In accordance with the deceased's will, the trustees had acquired assets after the deceased's date of death.

The trustees made capital gains during the 2010-11 income year.

The deceased's spouse passed away during the 2010-11 income year and the trust vested on the date of their death.

The estate did not make any distributions of capital to the deceased's spouse during the 2010-11 income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-75
Income Tax Assessment Act 1997 Section 115-228

Income Tax Assessment Act 1997 Subdivision 110-A

Income Tax Assessment Act 1997 Division 128

Reasons for decision

Section 115-228 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out the requirements for streaming a capital gain to a particular beneficiary. For streaming to be effective for tax purposes, the beneficiary must be specifically entitled to all or part of the capital gain.

A beneficiary is specifically entitled to a capital gain if the following two conditions are satisfied:

The first condition for a beneficiary to be specifically entitled to a capital gain is that the beneficiary receives, or is reasonably expected to receive, an amount equal to their share of the net financial benefit that is referable to the capital gain. A beneficiary's entitlement can be expressed as a dollar amount, a share of the trust gain, such as 25% of the trust capital gain realised on the sale of asset X, or using a known formula provided it refers to the capital gain.

The second condition for a beneficiary to have a specific entitlement to a capital gain is that the beneficiary's entitlement to the amount is recorded in its character as referable to the capital gain. This record must be contained in the accounts or records of the trust, such as the trust deed, trust accounts, resolutions and distribution statements, including schedules and notes attached to, or intended to be read with, these documents. A record for tax purposes only does not create specific entitlement.

A resolution to distribute a specified amount of trust income, a percentage of the trust income or the balance of the trust income does not create a specific entitlement if there is no reference to a capital gain. However, if the capital gain is clearly referred to in another document, such as the trust accounts, the recording requirement may be satisfied.

When a beneficiary is specifically entitled to a capital gain, the beneficiary is assessed on the capital gain, with all the associated tax consequences in respect of that distribution applying. Capital gains to which no beneficiary is specifically entitled flow proportionally to beneficiaries and/or the trustee based on their proportional share of the income of the trust estate. Accordingly, a specifically-entitled beneficiary will not be assessed on any share of the trust's net income over and above the amount of the specific entitlement unless they have a present entitlement to other income of the trust.

In this case, the deceased passed away and left a life interest to their spouse. In accordance with the deceased's will, the trustees of the estate had acquired assets after the deceased's date of death.

Upon the death of the life tenant, CGT event E5 occurred, and a capital gain was made by the trustees. The trustees had also made capital gains during the 2010-11 income year prior to the date the life tenant passed away.

The beneficiaries' entitlement to the capital of the trust has been calculated, documented and paid to the beneficiaries.

As both of the conditions listed above have been met, the beneficiaries to be viewed as specifically entitled beneficiaries. Therefore, the capital gains made by the trustees of the estate during the 2010-11 income year can be streamed to the beneficiaries.