Edited version of private advice

Authorisation Number: 1051849412765

Date of advice: 8 June 2021

Ruling

Subject: Assessability of certain receipts

Question 1

Are the amounts characterised as levies in the accounting records of the Trust assessable income under s6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Are other amounts received by the Trust, such as interest on bank accounts, assessable income under s6-5 of the ITAA 1997?

Answer

Yes

Question 3

To the extent that receipts are assessable income will the trust be required to lodge an income tax return and advise the unitholders of the requirement to report their share of the assessable amounts in their income tax returns?

Answer

Yes

Question 4

Will the acquisition and disposal of units in the Trust fall for consideration under the CGT provisions in Parts 3-1 and 3-3 of the ITAA 1997?'

Answer

Yes

This ruling applies for the following period

Income year ended 30 June 2020

Income year ended 30 June 2021

Income year ended 30 June 2022

Income year ended 30 June 2023

Income year ended 30 June 2024

Income year ended 30 June 2025

Income year ended 30 June 2026

Income year ended 30 June 2027

Income year ended 30 June 2028

Income year ended 30 June 2029

The scheme commences on:

1 July 2019

Relevant facts and circumstances

1.    A private company is the trustee fof a Trust.

2.    The Trust is a unit trust.

3.    The Trust has an environmental object.

4.    The shareholders in the Company are the same as the unit holders in the Trust.

5.    Certain amounts have been described as levies in the accounting records.

Relevant legislative provisions

Section 6-5 Income Tax Assessment Act 1997

Section 6-10 Income Tax Assessment Act 1997

Division 104 Income Tax Assessment Act 1997

Division 108 Income Tax Assessment Act 1997

Division 110 Income Tax Assessment Act 1997

Division 112 Income Tax Assessment Act 1997

Division 116 Income Tax Assessment Act 1997

Reasons for decision

Levies

The term 'income' is not defined in the Income Tax Assessment Act 1936 (ITAA 1936) or ITAA 1997. However extensive case law has established that it does not include a contribution of capital.

In GP International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation, the Full High Court stated, at 90 ATC 4420:

To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business.

Amounts that are periodical, regular or recurrent, relied upon by the recipient for their regular expenditure and paid to them for that purpose are likely to be ordinary income, as are amounts that are the product in a real sense of any business of, or services rendered by, the recipient.

Ultimately, whether or not a particular receipt is ordinary income or capital depends on its character in the hands of the recipient. The whole of the circumstances must be considered and the motive of the payer may be relevant to this consideration.

Paragraph 10 of TR 2012/D1 Income tax: meaning of 'income of the trust estate' in Division 6 of Part III of the Income Tax Assessment Act 1936 and related provisions states: 'Income' and 'trust estate' are distinct concepts, income being the product of the trust estate. Therefore, an amount which forms part of the trust estate will not be treated as income of the trust.

The terms of the Trust Deed and the subsequent obligation imposed on the trustee, indicate that the trust is not engaging in a profit-making business. The capital contributions made by members are capital receipts as they form part of the corpus, or subject matter, of the trust and are not paid to the trust for provision of services by the trust. They form part of the trust estate and are not income of the trust estate. The other levies are supplementary to the settlement of corpus and are capital amounts and also not income of the trust.

Interest on bank accounts:

Section 6-5 of the ITAA 1997 provides that assessable income includes income according to ordinary concepts, which is called ordinary income. The characteristics of ordinary income that have evolved from case law include receipts that:

• are earned;

• are expected;

• are relied upon; and

• have an element of periodicity, recurrence or regularity.

The receipt of interest is assessable income (Case W40 89 ATC 399 at 403).

The principle of mutuality does not apply to receipts derived from sources other than the contributors to the common fund, such as interest or income from a business activity conducted by the members (see Revesby Credit Union at 575).

As such, bank interest derived by the Trustee will be assessable income for the purposes of section 6-5 of the ITAA 1997.

Present Entitlement

In order for beneficiaries to be presently entitled to income of the trust, they must have a right to be paid a share by the trustee.

The trust deed provides that the Trustee shall determine in its absolute discretion the proportion of the net income available for distribution to the unitholders.

Any distributions of trust income by the Trustee to unitholders would be assessed under section 97 of the ITAA 1936 and this share of income must be included in the unitholders individual tax returns.

If the trustee does not exercise power to distribute, the Trustee will be assessed on the net income of the Trust under section 99A of the ITAA 1936. The Trust will be required to lodge a return for any income to which no beneficiary is presently entitled in accordance with section 99A of the ITAA 1936.

Capital Gains Tax

The units in the unit trust are capital gains assets and any units that are acquired or disposed of are subject to capital gains tax provisions in Parts 3-1 and 3-3 of the ITAA 1997.

Under section 6-10 of the ITAA 1997, assessable income also includes statutory income. Capital gains are included as assessable income under section 102-5 of the ITAA 1997.

Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if an event happens to a CGT asset. Units in a unit trust are a CGT asset under section 108-5 of the ITAA 1997. There are two events that could apply to unit holders in a unit trust. These are CGT event A1 and CGT event E4.

The most common event, event A1, occurs when you dispose of your ownership interest in a CGT asset to another CGT entity such as when a unitholder enters into a contract to sell a unit in a unit trust.

The capital gain or capital loss is made at the time of the event (section 104-10 of the ITAA 1997).

To determine the amount of a capital gain or loss that has arisen from a CGT event, the "cost base" of the asset is compared with the "capital proceeds" from the event.

You make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base.

Subsection 116-20(1) of the ITAA 1997 provides the general rules as to the calculation of capital proceeds, which reads as follows:

(1) The capital proceeds from a CGT event are the total of:

(a) the money you have received, or are entitled to receive, in respect of the event happening; and

(b) the market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out as at the time of the event).

The cost base includes the cost of the asset and other capital expenditures associated with the acquisition, improvement or disposal of the asset.

Section 110-25 provides the general rules about cost base. There are five elements to the cost base. In this case are the first and fourth elements are relevant.

Subsection 110-25(2) of the ITAA 1997 provides that the first element of a Capital Gains Tax (CGT) asset is the money paid in respect of acquiring the CGT asset plus the market value of any property given in respect of acquiring it. In this case the money paid to acquire the units in the unit trust.

The fourth element of the cost base of a CGT asset according to subsection 110-25(5) of the ITAA is capital expenditure the taxpayer incurred for the purpose or the expected effect of which is to increase or preserve the asset 's value.

The capital amounts paid would be included in the first element of the cost base. The capital contributions relating to the material change of use may be included in the fourth element of the cost base.

If the trustee has ever distributed capital back to unit holders, there would be a CGT event E4 (section 104-70) and that would reduce the cost base. If these non-assessable amounts eventually exceed the original cost base, a capital gain is deemed to arise for any excess. You cannot make a capital loss from CGT event E4.