Edited version of private advice

Authorisation Number: 1052143389048

Date of advice: 21 August 2023

Ruling

Subject: Commissioner's discretion - capital account election

Question

Will the Commissioner exercise his discretion under subparagraph 275-115(3)(a)(ii) of the Income Tax Assessment Act (ITAA 1997) to allow a later day for the Trustee to make a choice for capital gains to be the primary basis for calculating the gains or losses of the trust from the disposal of the trust assets?

Answer

Yes, until 18 September 2023.

This ruling applies for the following period:

Year ended 30 June 2014

The scheme commenced on:

7 November 2013

Relevant facts and circumstances

TheTrust is a special purpose trust established as a collective investment vehicle for Australian resident investors to acquire a commercial office building.

The Trust Deed was settled in 2013.

The Trust has not owned any other assets apart from this commercial office building, from the time of purchase.

The Trust activities are managed by Entity A.

The Trust has met the definition of a managed investment trust (MIT) pursuant to section 275-10 of the ITAA 1997 since the Trust was settled. However, no disclosure was made in the Trust's income tax return in the first income year.

The Trustee has not made a Capital Account Election in the first year of being a managed investment trust (MIT), as the Trustee and their Tax Agent incorrectly classified the Trust as not being a MIT in the first year of income.

This error was also present in the tax returns for the subsequent income years.

The Trust contends:

•         The error did not become apparent until the time the Trust's return was being prepared for the relevant year. This was due to the review of another trust whose activities are also managed by Entity A. After the Commissioner has allowed an extension of time for this other trust to make a capital account election, Entity A has instructed the Tax Agent to review the MIT status of its other trust unit syndicates that it manages.

•         As part of this review, it was identified that when the initial MIT assessment was undertaken in the Trust's first income year, the assessment was inadvertently conducted by analysis only of the ordinary unit holder register and not the performance unit holder register. This resulted in the Tax Agent reaching an incorrect conclusion with respect to the widely-held test pursuant to subsection 275-20(1) of the ITAA 1997, as it was the understanding of the Tax Agent that there were less than 25 members.

•         It has always been the Trustee's view that the property held by the Trust is held on capital account, and the income tax return and account for the Trust has been prepared consistently as if an election had been made.

•         The Trustee took reasonable steps by instructing the Tax Agent to review this Trust and take corrective action as required.

•         Any prospective realisation of the commercial property will be on capital account under ordinary principles hence the capital account election does not change the impact of any future capital contributions received by the unit holders of the Trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 subparagraph 275-115(3)(a)(ii)