Edited version of private advice

Authorisation Number: 1052000859794

Date of advice: 30 June 2022

Ruling

Subject: CGT event E4

Question

Will the distribution of the net proceeds from the property result in CGT event E4 happening?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1.    The Trust is an Australian resident unit trust.

2.    The Trust is not an AMIT.

3.    The trustee of the Trust is Trustee Pty Ltd (the Trustee).

4.    The Trust was the registered owner of property.

5.    Settlement has completed for sale of that property.

6.    On 6 May 20XX, the unitholders of the Trust made the following resolution by special resolution:

That the Trustee:

                         i.     shall distribute so much of the proceeds from the sale of the property which remain after the trustee has discharged any related borrowings and has provided for the direct and indirect costs of disposing of the property;

                        ii.    is authorised to distribute the proceeds of sale: first, out of the accounting profit recognised by the trustee with respect to the sale; and second, with respect to any balance thereof, out of contributed capital;

7.    A portion of the distribution of the sale proceeds made by the Trustee to the unitholders of the Trust will not be assessable in the hands of the unitholders as it will be attributed to tax deferred amounts associated with accounting differences in income.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection104-70(1)

Income Tax Assessment Act 1997 Subsection104-70(1A)

Income Tax Assessment Act 1997 Subsection104-70(8)

Income Tax Assessment Act 1997 Subsection104-70(9)

Reasons for decision

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

Detailed reasoning

8.    Subsections 104-70(1) and 104-70(1A) provide:

(1) CGT event E4 happens if:

(a) the trustee of a trust makes a payment to you in respect of your unit or your 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.

To avoid doubt, in applying paragraph (b) to work out what part of the payment is included in your assessable income, disregard your share of the trust's net income that is subject to the rules in subsection 115-215(3).

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.

Note 2: The non-assessable part includes amounts (tax-deferred amounts) associated with the small business 50% reduction, frozen indexation, building allowance and accounting differences in income.

Note 3: A payment made to you after you stop owning the unit or interest in the trust forms part of the capital proceeds for the CGT event that happened when you stopped owning it.

(1A) However, CGT event E4 does not happen if the unit or interest mentioned in subsection (1) is a unit or interest in an * AMIT.

9.    These requirements are met because:

•         The distribution of the sale proceeds by the trustee will not result in any of CGT events A1, C2, E1, E2, E6 or E7 happening

•         Part of the distribution will not be assessable in the hands of the unitholders of the Trust as it will be attributed to tax deferred amounts associated with accounting differences in income

•         The Trust is not an AMIT.

10.  Therefore, in the absence of an exception applying, CGT Event E4 will happen.

Exceptions

11.  Subsections 104-70(8) and 104-70(9) provide:

(8) CGT event E4 does not happen to the extent that the payment is reasonably attributable to a * LIC capital gain.

(9) CGT event E4 does not happen for a payment made to a foreign resident to the extent that the payment is reasonably attributable to * ordinary income or * statutory income from sources other than an * Australian source. However, this exception does not apply if the trust is a * public trading trust.

12.  These exceptions do not apply because the payment is attributable to the sale of an asset owned by the Trust that is located in Australia.

Conclusion

13.  The distribution of the sale proceeds by the Trustee will result in CGT event E4 happening. Where CGT event E4 happens, the unitholder will need to make cost base adjustments to the units or trust interest.