Edited version of private advice

Authorisation Number: 1052312011795

Date of advice: 30 October 2024

Ruling

Subject: CGT - Trust

Question 1

Will a capital gain distribution from a discretionary trust be treated as non-arm's length income under subsection 295-550(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes

Question 2

Can the Fund trustee apply its capital losses, discounts and concessions to the capital gain distribution it receives from the discretionary trust in accordance with section 102-5 of the ITAA 1997?

Answer 2

Yes

Question 3

Is a capital gain or any part of the capital gain distribution the Fund receives as the beneficiary of the discretionary trust, assessable as a contribution under 295-160 of the ITAA 1997?

Answer 3

Yes

This ruling applies for the following period:

1 July 2024 to 30 June 2025

Relevant facts and circumstances

The Fund is a self-managed superannuation fund.

The Trust is a related party of the Fund.

In accordance with the Trust Deed, the trustee has the power in his absolute discretion 'to pay or transfer any investments or moneys appropriated to a share to which any beneficiary is or becomes absolutely entitled if he is not an infant.'

The Trust Deed provides 'the 'Main Beneficiaries' means the person or persons named in the Schedule herein under the heading 'Main Beneficiaries' or the Trustee of any Trust nominated by the Trustee herein.'

The Trust's trustee will nominate the trustee of the Fund as a Main Beneficiary in accordance with the Trust Deed. As such it will then be able to make a distribution to the Fund.

You have stated that a gross capital gain distribution will be made to the Fund in the 2024-25 income year.

The Fund has carried forward capital losses from previous years that are greater than the distribution.

Assumptions

The Trust will make a capital gain distribution to the Fund in the 2024-25 income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 115-215

Income Tax Assessment Act 1997 section 295-160

Income Tax Assessment Act 1997 section 295-545

Income Tax Assessment Act 1997 section 295-550

Income Tax Assessment Act 1997 Subdivision 115-C

We followed these ATO view document

Taxation Ruling TR 2010/1DC: Income tax: superannuation contributions

Reasons for Decision

Capital gains distribution

The related Trust is a discretionary trust. The Trust will make a net capital gain distribution to the Fund. The Fund has carried forward losses that can be applied to the capital gains.

Section 295-545 of the ITAA 1997 provides that the taxable income of a complying superannuation fund is split into a non-arm's length component and a low tax rate component. The note to subsection 295-545(1) explains that a concessional rate of tax applies to the low tax component, while the non-arm's length component is taxed at the highest marginal rate.

Subsection 295-545(2) of the ITAA 1997 provides that the non-arm's length component for an income year is the entity's non-arm's length income for that year less any deductions to the extent that they are attributable to that income. The definition of 'non-arm's length income' is given by section 295-550 and includes ordinary income or statutory income.

Subsection 295-550(4) of the ITAA 1997 states that 'Income derived by the entity as a beneficiary of a trust, other than because of holding a fixed entitlement to the income, is non-arm's length income of the entity.'

Accordingly, where the Fund receives distributions from the discretionary trust it will be classed as non-arm's length income.

A net capital gain received by the Fund through a trust distribution is statutory income as per section 102-5 of the ITAA 1997.

The Fund will include the non-arm's length income from the trust distribution in the 'non-arm's length component' of its assessable income. The net capital gain will retain its statutory income character within the non-arm's length component.

Subdivision 115-C of the ITAA 1997 sets out the rules for dealing with the net income of a trust that has a net capital gain, worked out in accordance with section 115-215. The rules operate generally to attribute capital gains made by the trust as being a capital gain in the hands of the beneficiaries, letting the beneficiary reduce those gains by applying their capital losses and discounts to those gains.

This is achieved by subsection 115-215(4A) of the ITAA 1997, which provides that the grossed up capital gain distributed to the beneficiary is a capital gain for the purposes of Division 102 of the ITAA 1997.

Section 102-5 of the ITAA 1997 requires a trust beneficiary to include a net capital gain derived from a trust in their assessable income. This section also details how to calculate that net capital gain, which is the total capital gains, reduced by applying any capital loses (carried forward from previous years or from the present year) and any available capital gains tax discounts and concessions.

If the Fund's net capital gain is reduced to nil after applying carried forward capital losses from previous years, then the Fund will have no amount of non-arm's length income referable to the capital gain.

The amount of the non-arm's length income cannot exceed the Fund's net capital gain as calculated under subsection 102-5(1) of the ITAA 1997 for the relevant income year.

Contributions

In the superannuation context, a contribution is anything of value that increases the capital of a superannuation fund provided by a person whose purpose is to benefit one or more particular members of the fund or all of the members in general[1].

Whether an amount is a contribution is a question of fact and requires an objective determination of the natural and probable consequences of a person's actions in providing something of value that increases the capital of a superannuation fund may be to benefit one or more particular members of the fund or all of the members in general[2].

However, where a distribution from a discretionary trust is made, the Commissioner's view is that the distribution is objectively a contribution. TR 2010/1DC: Income tax: superannuation contributions states:

141. An entitlement to income or capital from a trust in which the superannuation provider has an interest will not be a contribution to the fund where the fund is merely receiving income or capital as a return on, or of, moneys invested in the trust in the same way as any other entity that has an interest in the trust. In these circumstances, the distribution is not made because the recipient is a superannuation provider but because it is entitled to a return on, or of, the investment in the trust.

142. An appointment of income or capital made by the trustee of a discretionary trust to a superannuation provider is, however, a contribution to the fund. In these circumstances, the appointment increases the capital of the superannuation fund. The amount cannot be characterised as income, profit or gain from the use of the existing capital of the fund. Further, in appointing an amount to a trust that has a particular purpose, whether the trust is a charitable trust or superannuation fund, the trustee must be taken to intend to have the appointed amount used for the purpose of that trust. It is therefore necessary to conclude that the trustee's purpose in appointing an amount to a superannuation fund is to provide benefits to the members of the fund. The trustee of the discretionary trust will be concerned with the identity of the superannuation provider when choosing between the objects of the trust.

Creating rights in the superannuation provider

204. A contribution of property by way of the creation of a contractual right or other legal or equitable right in the superannuation provider will occur when the superannuation provider commences to hold that right.

205. For example, a superannuation provider commences to hold a right to receive income or capital from a discretionary trust as soon as the trustee of the discretionary trust appoints the trust income or capital.

The value that increases the capital of the superannuation fund is the actual amount appointed by the trustee, this being the amount of distribution made by the trustee to the superannuation fund as the beneficiary of the discretionary trust.

What the distribution comprises of (ie business income, rental income, capital gains etc) is not relevant in determining whether it is a contribution or not, nor does it change the amount of the contribution.

Where the distribution from the discretionary trust includes one or more capital gains of the trust, the amount of the value of the contribution to the fund, being the distribution amount itself, is not reduced by any of reductions under subsection 102-5(1) of the ITAA 1997. The reductions include the prior and current year capital losses, discount percentage or small business concessions in Subdivisions 152-C, 152-D and 152-E.

These reductions are only made available for tax purposes, specifically, to work out the net capital gain and should not be conflated with determining the contribution amount.

Therefore, an appointment of income or capital made by a trustee of a discretionary trust to a superannuation fund is a contribution to the fund in accordance with section 295-160 of the ITAA 1997 and is also non-arm's length income to the fund under subsection 295-550(4).

In this case, the amount of the contribution will be the distribution made by the Trust to the Fund. This amount of distribution is not altered, modified or impacted by the capital losses under subsection 102-5(1) of the ITAA 1997.

Nil capital gain

Where a superannuation fund's net capital gain for the income year is nil due to the application of capital losses and previously unapplied net capital losses we consider that the view outlined above does not change.

The reductions in the method statement by capital losses, discount or other concessions, as per subsection 102-5(1) of the ITAA 1997, are not contributions in their own right. That is, they are not an increase in capital of the superannuation fund that is provided by a person whose purpose is to benefit a member(s), but are reductions only for tax purposes, specifically, to work out the net capital gain and the maximum amount of the capital gain that can be non-arm's length income.

In this case, it is expected that the gross capital gain distribution will be reduced by carried forward capital losses to nil. However, the amount of the contribution still remains the amount of the distribution made by the Trust to the Fund.

[1] Paragraph 4 of TR 2010/1DC

[2] Paragraph 143 of TR 2010/1DC