Edited version of your private ruling

Authorisation Number: 1012477901463

Ruling

Subject: CGT event E4-Payment of CGT concession amount

Question 1

Can the CGT concession amount in respect of the discountable capital gain made by XX be distributed as a tax free distribution to unit holders where the discountable capital has been reduced to nil by the application of either current or carried forward prior year losses?

Answer

Yes

Question 2

If the answer to question one is yes, where the tax free CGT concession amount is not distributed in the tax year in which the respective discountable capital gain was made, can the CGT concession amount be carried forward and be distributed in a subsequent income year and still retain its character as a tax free the CGT concession amount?

Answer

Yes

This ruling applies for the following periods:

01 July 2011-30 June 2012

Relevant facts and circumstances

The XX is an Australian resident unit trust,

XX is a managed investment trust ("MIT") for the purposes of the pay as you go withholding tax rules in Subdivision 12H of the Taxation Administration Act 1953 (the "TAA 1953") and also for the purposes of the capital account election provisions in Division 275 of the ITAA 1997.

XX made the MIT capital account election in the approved form. The election is effective from 1 July 2008 and deems all gains or losses made on the disposal of covered assets to be on capital account for income tax purposes.

30 June X tax position:

For the year ended 30 June X, the XX was in the following position:

XX had allowable deductions that exceeded assessable income deductions resulting in a net tax loss.

XX had carried forward revenue losses from the prior tax year.

XX does not have any carried forward capital losses from the prior year, and did not make a capital losses in the year ended 30 June X.

XX made a capital gain during the year ended 30 June X.

The assets sold by XX had been held far more than twelve months, and therefore the gain made on sale is a discountable capital gain for capital gains tax ("CGT") purposes.

'The net capital gain was fully offset by revenue losses.

After application of the revenue losses, XX has remaining carried forward revenue losses.

As XX is in a net tax loss position and the discountable gain has been fully offset by revenue losses, no distribution of capital gains was made by the XX in relation the year ended 30 June X.

Relevant legislative provisions

Income Tax Assessment Act 1997

   subsection 102-5(1)

   section 104-10

   section 104-70

   subsection 104-70(4)

   subsection 104-70(6)

   section 104-71

   item 1 of the table in subsection 104-71(4)

Other References

Explanatory Memorandum to the Taxation Laws Amendment Bill (No 2) 2000

Explanatory Memorandum to the Taxation Laws Amendment Bill (No 5) 2001

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise specified.

Detailed reasoning

Question 1

Subsection 104-70(1) provides that:

(1)  CGT event E4 happens if: 

(a) the trustee of a trust makes a payment to you in respect of a unit or an interest in the trust (except for *CGT event A1, C2, E1, E2, E6 or E7 happening in relation to it); and

(b) some or all of the payment (the non-assessable part) is not included in your assessable income.

Note 1:

Subsections 104-71(1) (tax-exempted amounts), 104-71(3) (tax-free amounts) and 104-71(4) (CGT concession amounts) can affect the calculation of the non-assessable part.

CGT event E4: adjusting the non-assessable part

Section 104-71 applies where a payment from a trustee triggers CGT event E4. It provides that certain concessionally treated amounts are excluded when working out the "non-assessable part" of the payment for the purposes of section 104-70 FBTAA. This ensures that CGT event E4 does not clawback tax concessions that are intended to flow through a trust to the ultimate beneficiary or unit holder. Note 1 to section 104-71 categorises the excluded amounts as:

· tax-exempted amounts (listed in subsection 104-71(1))

· tax-free amounts (listed in subsection 104-71(3)), and

· CGT concession amounts (listed in subsection 104-71(4)).

Exclusion: CGT concession amounts

In working out the non-assessable part of a payment for the purposes of CGT event E4, the CGT concession amounts are excluded.

Subsection 104-71(4) sets out the rules for determining what part of the payment is excluded for relevant entities. The amount of the non-assessable part referred to in section 104-70 for an entity shown in the table in subsection 104-71(4) is adjusted to exclude the amount or amounts applicable to the entity under the table. It excludes from non-assessable payments, capital gains that are distributed to an interest holder that were not included in the assessable income of the interest holder because of the application of the CGT general discount.

Item 1: discount capital gains

Item 1 of the table in subsection 104-71 (4) excludes from the non-assessable part of any payment made by a trustee of a trust to a unit or interest holder, any CGT concession amount reflected in the non-assessable part of the payment. The non-assessable part, as stated earlier, has been determined in accordance with section 104-70. The CGT concession amount of a payment made by a trustee of a trust to a unit holder or interest holder includes the general CGT discount amount calculated under Division 115, and excluded from the trust's net capital gain by step 3 of the calculation of the trust's net capital gain in subsection 102-5(1).

Note: The effect of a non-assessable part of the payment by a trustee of a trust to a unit or interest holder is to reduce the cost base and reduced cost base of their interest in the trust by the amount of the non-assessable part. A unit or interest holder makes a capital gain if the sum of the non-assessable parts of the payment is more than their cast base (subsection 104-70(4) of the ITAA 1997).

XX made a discountable capital gain in the year ended 30 June X.

Ordinarily the discount portion of a capital, as explained earlier, is excluded from any non-assessable payment by the operation of subsection 104-70(4) of the ITAA 1997. However, is this still the case if the net income of the trust for the relevant income year is reduced to nil by the application of current or prior year losses?

As stated earlier for the discount portion of a capital gain to be excluded from a non-assessable payment, it must be reflected in the payment. Therefore the question is, if the trust has a nil net income, can a payment made to a unit or interest holder be said to include the discount portion of the capital gain the trust made?

It has been established that XX made a net capital gain, calculated in accordance with subsection 102-(5). The net capital gain was included in the net income of the trust. This is not altered by the application of current or prior year revenue losses reducing the net income of the relevant year to nil. Therefore, the CGT discount can be reflected in a payment made to its unit or interest holders (see ATO Interpretative Decision ATO ID 2010/84).

Question 2

Detailed reasoning

The Explanatory Memorandum to the New Business Tax System (Miscellaneous) Bill (No.2) 2000 which inserted section 104-71 into the ITAA 1997 contains examples where the CGT concession amount was paid to investors in a year subsequent to the income year in which the net capital gain was made.

The examples indicate that the payment of the concession amount has the same character if paid in subsequent years as it would have had if made in the year the capital gain was made.

Therefore if the payment would have included an amount excluded from the non-assessable part because of the CGT discount, if the payment was made in the year the net capital gain was made, this is not altered if the payment is made in a subsequent year.

Taking into account the above, XX can make a payment of the CGT concession amount to its unit holders in the following or subsequent income year (if not made in the following income year) and the CGT discount attributable to the net capital gain made in the 2012 income year will be reflected in that payment. That is XX can carry forward and distribute the CGT concession amount in a subsequent year and it will retain its character as a tax free CGT concession amount.