When the reduction applies
In some circumstances, Subdivision 115-C of the ITAA 1997 reduces the capital gains of the trust assessed to the beneficiaries and trustee to ensure they are not assessed on more than the total net income of the trust.
The reduction applies if the sum of the franked distributions (less directly relevant deductions) and net capital gain of the trust exceeds the net income of the trust (excluding franking credits). For example, this may occur if a trust's only income is from capital gains and franked distributions and it has general management expenses.
Example: tax treatment of trust capital gains where rateable reduction applies
In the 2019–20 income year, Trailerpark Trust:
- received rental income of $50,000
- incurred general deductions of $60,000
- made a discountable capital gain of $150,000
- had a carried forward capital loss of $10,000.
The trust deed states that capital gains form part of trust income. The trust's capital gain as calculated under the deed is therefore $140,000 (that is, after the capital loss was subtracted).
The trust's income is $130,000, made up of the $50,000 rental income and the $140,000 capital gain less the general deductions of $60,000.
The trust's net capital gain for tax purposes is $70,000, which is the $150,000 capital gain, less the $10,000 capital loss, reduced by the 50% CGT discount (($150,000 − $10,000) × 50% = $70,000).
The net income of the trust is therefore $60,000, made up of $50,000 rental income and the net capital gain of $70,000 less the general deductions of $60,000.
The trust has 2 resident beneficiaries, Ricky and Julian, neither under a legal disability. In accordance with a power under the deed, the trustee resolves to make Julian specifically entitled to $110,000 of the capital gain.
$20,000 of trust income remains unallocated ($130,000 − $110,000). The trust deed states that any remaining income is to be split equally between Ricky and Julian as beneficiaries. This results in each being presently entitled to an additional $10,000 ($20,000 ÷ 2).
Working out each beneficiary's extra capital gain
Working out each beneficiary's extra capital gain involves 4 steps.
Step 1: Determine the share
Each beneficiary's share of the capital gain is made up of both:
- any amount they are specifically entitled to
- their adjusted Division 6 percentage share of the part of the capital gain to which no beneficiary is specifically entitled to.
Ricky is not specifically entitled to any part of the capital gain.
Julian's specific entitlement to the capital gain is calculated as:
- Capital gain × (share of net financial benefit ÷ net financial benefit)
- = 150,000 × (110,000 ÷ 140,000)
- = $117,857
Therefore, the amount of the capital gain to which no beneficiary is specifically entitled is $32,143 (that is, $150,000 − $0 (Ricky’s specific entitlement) − $117,857 (Julian’s specific entitlement)).
To work out each beneficiary's share of this remaining $32,143 capital gain, they first need to work out their adjusted Division 6 percentage of the trust's income. This is done by:
- working out their present entitlement to trust income, excluding any capital gains and franked distributions they are specifically entitled to
- expressing the result as a percentage of the amount of trust income, excluding any capital gains or franked distributions any entity is specifically entitled to.
Ricky and Julian’s specific entitlements to the capital gain of the trust have now been calculated.
Therefore, trust income, excluding the capital gains to which any entity is specifically entitled, is $12,143 ($130,000 income less Julian’s specific entitlement to the capital gain of $117,857).
Ricky's adjusted Division 6 percentage is calculated as:
Ricky's present entitlement to trust income less his specific entitlement, which is $10,000 ($10,000 − nil specific entitlement)
divided by $12,143 (being the trust income excluding amounts of capital gains and franked distributions any entity is specifically entitled to)
= 82.35%.
Julian's adjusted Division 6 percentage is calculated as:
Julian's present entitlement to trust income, which is $120,000 ($110,000 + $10,000) less his specific entitlement to the capital gain ($117,857) = $2,143
divided by $12,143 (being the trust income excluding capital gains and franked distributions any entity is specifically entitled to)
= 17.65%.
Each beneficiary's share of the capital gain is made up of:
- any amount they are specifically entitled to, and
- their adjusted Division 6 percentage shares of the amount of the capital gain to which no beneficiary is specifically entitled ($32,143).
Therefore, each beneficiary's respective share of the capital gain is:
- Ricky: $0 + (82.35% × $32,143) = $26,469
- Julian: $117,857 + (17.65% × $32,143) = $123,531
Step 2: Work out the share as a percentage of the capital gain
Each beneficiary's percentage share of the trust's capital gain is calculated by dividing their share by the total capital gain and multiplying by 100:
- Ricky: ($26,469 ÷ $150,000) × 100% = 17.65%
- Julian: ($123,531 ÷ $150,000) × 100% = 82.35%
Step 3: Determine the attributable gain
Each beneficiary’s attributable gain is their share of the capital gain (expressed as a percentage) multiplied by the net income of the trust relating to the capital gain.
In this example however, the net income of the trust of $60,000 falls short of the trust's net capital gain of $70,000.
As a result, the trust's net capital gain will be rateably reduced before the attributable gain can be calculated. This is done by multiplying the net capital gain by the net income of the trust estate dividend by the sum of the net capital of the trust estate and franked distributions (if any):
$70,000 × ($60,000 ÷ $70,000) = $60,000
Therefore, the net income of the trust relating to the capital gain is $60,000.
Multiply the $60,000 by each beneficiary's percentage share of the capital gain (worked out at step 2) to work out their attributable gain:
- Ricky: $60,000 × 17.65% = $10,590
- Julian: $60,000 × 82.35% = $49,410
Step 4: Gross up the attributable gain
As the trustee applied the 50% CGT discount to the capital gain, each beneficiary must double their attributable gain (worked out at step 3) to work out their extra capital gain:
- Ricky: $10,590 × 2 = $21,180
- Julian: $49,410 × 2 = $98,820
Ricky and Julian add their extra capital gain to any of their own capital gains before deducting any current or prior year capital losses they have and applying any relevant discounts to determine their own net capital gain. As they are individuals, they are entitled to the 50% CGT discount.
If they have no other capital gains or capital losses:
- Ricky would have a net capital gain of $10,590 ($21,180 reduced by the 50% CGT discount)
- Julian would have a net capital gain of $49,410 ($98,820 reduced by the 50% CGT discount).
How to report this example in the Trust tax return statement of distribution (SOD)
Show at label F Capital gains each beneficiary’s share of the trust's (net) capital gains. Show whole dollars only.
Rateable reduction should be apportioned evenly against the beneficiary CGT amounts. In this example, the NPP amount reported at label B is nil and not a loss of $10,000. This is because the $10,000 is taken into account in the rateable reduction when reporting the capital gain to be $60,000 at label F.
Note 1: The methodology described is specific to this example and it does not include franked dividends which can also be subject to a rateable reduction.
Note 2: The rateable reduction methodology applies on a 'gain by gain' basis to the amount of each capital gain of the trust that remains after step 4 of the method statement for calculating the net capital gain of the trust. This means if there is more than one capital gain you will have to do a separate calculation for each capital gain. Do not aggregate all capital gains and then rateable reduce.
Step 1:
- Work out the rateable reduction percentage. Calculated by dividing the net income of the trust by the net capital gain ($60,000 ÷ $70,000) = 85%.
Step 2:
- Trust Label F amounts are then multiplied by the rateable reduction percentage and then multiplied by each beneficiary’s adjusted Division 6 percentage, (see step 2 in example).
Relevant SOD labels for this example including CGT calculation elements for label F Capital gains are shown in the following tables.
Label | Calculation element | Amount | How to calculate the rateable reduction amount |
|---|---|---|---|
A | Primary Production | $0 | N/A |
B | Non-Primary Production | $0 | N/A |
F | Capital gains | $10,590 | ($70,000 x 85%) x 17.65% |
F1 | Gross capital gain | $22,680 | ($150,000 x 85%) x 17.65% |
F2 | Capital losses applied | $1,500 | ($10,000 x 85%) x 17.65% |
F3 | CGT discount applied | $10,590 | ($70,000 x 85%) x 17.65% |
F4 | CGT small business concessions applied | $0 | N/A |
F F1 - F2 - F3 - F4 = F Capital gains $10,590
Label | Calculation element | Amount | How to calculate the rateable reduction amount |
|---|---|---|---|
A | Primary Production | $0 | N/A |
B | Non-Primary Production | $0 | N/A |
F | Capital gains | $49,410 | ($70,000 x 85%) x 82.35% |
F1 | Gross capital gain | $105,819 | ($150,000 x 85%) x 82.35% |
F2 | Capital losses applied | $7,000 | ($10,000 x 85%) x 82.35% |
F3 | CGT discount applied | $49,410 | ($70,000 x 85%) x 82.35% |
F4 | CGT small business concessions applied | $0 | N/A |
F F1 - F2 - F3 - F4 = F Capital gains $49,410