Edited version of your private ruling

Authorisation Number: 1012473939194

Ruling

Subject: Capital gains tax

Question

Are you eligible to apply the 50% capital gains tax (CGT) discount to any capital gain made on disposal of the listed securities?

Answer:

Yes

This ruling applies for the following period

Year ending 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· your application for private ruling.

· copy of the trust deed

· copy of 2 amendments to the trust deed

You are a discretionary family trust.

You are contemplating selling listed securities in the 2012-13 financial year which would incur a capital gain.

The securities have been held for longer than 12 months.

The trust deed does not give the trustee the power to stream capital gains.

The deed definition of income (as per the amendments) includes capital gains.

You estimate that there will be no distributable income for the 2012-13 financial year.

You state that due to carry forward tax losses, you estimate that the net income of the trust for the 2012-13 financial year will be nil.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 97(1)

Income Tax Assessment Act 1936 Section 95

Income Tax Assessment Act 1936 Section 99A

Income Tax Assessment Act 1936 Subsection 99A(4)

Income Tax Assessment Act 1997 Section 115-222

Reasons for decision

Detailed reasoning

Subsection 97(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that subject to Division 6D, where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate:

a) the assessable income of the beneficiary shall include:

i. so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and

ii. so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia.

On 30 March 2010, the High Court handed down its decision in Commissioner of Taxation v Bamford (2010) 240 CLR 481.  In that case, the Court considered the meaning of 'income of the trust estate' and the meaning of 'share' for the purposes of section 97 of the ITAA 1936. 

The Court clarified that:

· 'income of the trust estate' in section 97 of the ITAA 1936 refers to the distributable income of the trust as determined according to trust law and in accordance with the deed; and

· 'share' means 'proportion' such that once the share of the distributable income of the trust to which the beneficiary is presently entitled is determined, the beneficiary is assessed on that same percentage share of the trust's net income as defined in section 95 of the ITAA 1936 (hereafter referred to as the trust's 'taxable income'). 

This interpretation of the term 'share' is referred to as the proportionate approach.

Importantly, if there is no income actually available for distribution in a year then there is no amount to which a beneficiary can be presently entitled under section 97 of the ITAA 1936.

Subsection 99A(4) of the ITAA 1936 explains that where there is no part of the net income of a resident trust estate:

a) that is included in the assessable income of a beneficiary of the trust estate in pursuance of section 97;

b) in respect of which the trustee of the trust estate is assessed and liable to pay tax in pursuance of section 98; or

c) that represents income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia;

the trustee shall be assessed and is liable to pay tax on the net income of the trust estate at the rate declared by the Parliament for the purposes of this section.

The note to this subsection states: If the trust estate's net income includes a net capital gain, Subdivision 115-C of the Income Tax Assessment Act 1997(ITAA 1997) affects the assessment of the trustee.

Section 115-222 discusses the assessment of trustees under section 99 or 99A of the ITAA 1936. Subsection 115-222(4) of the ITAA 1997 explains that for each capital gain of the trust estate, increase the amount (the assessable amount) in respect of which you are liable to be assessed (and pay tax) under section 99A of the ITAA 1936 in relation to the trust estate by:

d) if the capital gain was not reduced under either step 3 of the method statement in subsection 102-5(1) (discount capital gains) or Subdivision 152-C (small business 50% reduction) - the amount mentioned in subsection 115-225(1); and

e) if the capital gain was reduced under either step 3 of the method statement or Subdivision 152-C but not both (even if it was further reduced by the other small business concessions) - twice the amount mentioned in subsection 115-225(1); and

f) if the capital gain was reduced under both step 3 of the method statement and Subdivision 152-C (even if it was further reduced by the other small business concessions) - 4 times the amount mentioned in subsection 115-225(1).

In your case, the trust deed allows for capital gains to be included in the 'income of the trust' estate, but does not give the trustee the power to stream capital gains. You estimate that the 'income of the trust estate' (distributable income) will be nil and due to carry forward tax losses the 'net income' of the trust estate (taxable income) will also be nil. There is no amount of 'income of the trust estate' that a beneficiary can be made presently entitled to and consequently, there is no amount that can be included in the assessable income of a beneficiary under subsection 97(1) of the ITAA 1936.

As there is no part of the net income of the trust estate that is included in the assessable income of a beneficiary of the trust estate in pursuance of section 97, any net income of the trust estate would normally be assessed to the trustee under section 99A of the ITAA 1936.

However, as there is no net income of the trust estate that the trustee can be assessed on under section 99A of the ITAA 1936, section 99A does not apply. Therefore Subdivision 115-C of the ITAA 1997 will not affect the assessment of the trustee and there is no need to increase the amount of the capital gain made by the trust. Accordingly, the 50% CGT discount may be applied to any capital gain made on disposal of the listed securities.