Tax Laws Amendment (2011 Measures No. 5) Act 2011 (62 of 2011)

Schedule 2   Interim changes to the taxation of trust income

Part 1   Main amendments

Income Tax Assessment Act 1997

11   Sections 115-220, 115-222 and 115-225

Repeal the sections, substitute:

115-220 Assessing trustees under section 98 of the Income Tax Assessment Act 1936

(1) This section applies if:

(a) you are the trustee of the trust estate; and

(b) on the assumption that there is a share of the income of the trust to which a beneficiary of the trust is presently entitled, you would be liable to be assessed (and pay tax) under section 98 of the Income Tax Assessment Act 1936 in relation to the trust estate in respect of the beneficiary.

(2) For each *capital gain of the trust estate, increase the amount (the assessable amount ) in respect of which you are actually liable to be assessed (and pay tax) under section 98 of the Income Tax Assessment Act 1936 in relation to the trust estate in respect of the beneficiary by:

(a) unless paragraph (b) applies - the amount mentioned in subsection 115-225(1) in relation to the beneficiary; or

(b) if the liability is under paragraph 98(3)(b) or subsection 98(4), and the capital gain was reduced under step 3 of the method statement in subsection 102-5(1) (discount capital gains) - twice the amount mentioned in subsection 115-225(1) in relation to the beneficiary.

(3) To avoid doubt, increase the assessable amount under subsection (2) even if the assessable amount is nil.

115-222 Assessing trustees under section 99 or 99A of the Income Tax Assessment Act 1936

(1) Subsection (2) applies if:

(a) you are the trustee of the trust estate; and

(b) section 99A of the Income Tax Assessment Act 1936 does not apply in relation to the trust estate in relation to the relevant income year.

(2) For each *capital gain of the trust estate, increase the amount (the assessable amount ) in respect of which you are liable to be assessed (and pay tax) under section 99 of the Income Tax Assessment Act 1936 in relation to the trust estate by the amount mentioned in subsection 115-225(1).

(3) Subsection (4) applies if:

(a) you are the trustee of the trust estate; and

(b) subsection (2) does not apply.

(4) For each *capital gain of the trust estate, increase the amount (the assessable amount ) in respect of which you are liable to be assessed (and pay tax) under section 99A of the Income Tax Assessment Act 1936 in relation to the trust estate by:

(a) if the capital gain was not reduced under either step 3 of the method statement in subsection 102-5(1) (discount capital gains) or Subdivision 152-C (small business 50% reduction) - the amount mentioned in subsection 115-225(1); and

(b) if the capital gain was reduced under either step 3 of the method statement or Subdivision 152-C but not both (even if it was further reduced by the other small business concessions) - twice the amount mentioned in subsection 115-225(1); and

(c) if the capital gain was reduced under both step 3 of the method statement and Subdivision 152-C (even if it was further reduced by the other small business concessions) - 4 times the amount mentioned in subsection 115-225(1).

(5) To avoid doubt, increase the assessable amount under subsection (2) or (4) even if the assessable amount is nil.

115-225 Attributable gain

(1) The amount is the product of:

(a) the amount of the *capital gain remaining after applying steps 1 to 4 of the method statement in subsection 102-5(1); and

(b) your *share of the capital gain (see section 115-227), divided by the amount of the capital gain.

(2) Subsection (3) applies if the net income of the trust estate (disregarding the amount of any *franking credits) for the relevant income year falls short of the sum of:

(a) the *net capital gain (if any) of the trust estate for the income year; and

(b) the total of all *franked distributions (if any) included in the assessable income of the trust estate for the income year (to the extent that an amount of the franked distributions remained after reducing them by deductions that were directly relevant to them).

(3) For the purposes of subsection (1), replace paragraph (a) of that subsection with the following paragraph:

(a) the product of:

(i) the amount of the *capital gain remaining after applying steps 1 to 4 of the method statement in subsection 102-5(1); and

(ii) the *net income of the trust estate for that income year (disregarding the amount of any *franking credits), divided by the sum mentioned in subsection (2); and

115-227 Share of a capital gain

An entity that is a beneficiary or the trustee of a trust estate has a share of a *capital gain that is the sum of:

(a) the amount of the capital gain to which the entity is *specifically entitled; and

(b) if there is an amount of the capital gain to which no beneficiary of the trust estate is specifically entitled, and to which the trustee is not specifically entitled - that amount multiplied by the entity’s *adjusted Division 6 percentage of the income of the trust estate for the relevant income year.

115-228 Specifically entitled to an amount of a capital gain

(1) A beneficiary of a trust estate is specifically entitled to an amount of a *capital gain made by the trust estate in an income year equal to the amount calculated under the following formula:

where:

net financial benefit means an amount equal to the *financial benefit that is referable to the capital gain (after any application by the trustee of losses, to the extent that the application is consistent with the application of capital losses against the capital gain in accordance with the method statement in subsection 102-5(1)).

share of net financial benefit means an amount equal to the *financial benefit that, in accordance with the terms of the trust:

(a) the beneficiary has received, or can be reasonably expected to receive; and

(b) is referable to the *capital gain (after application by the trustee of any losses, to the extent that the application is consistent with the application of capital losses against the capital gain in accordance with the method statement in subsection 102-5(1)); and

(c) is recorded, in its character as referable to the capital gain, in the accounts or records of the trust no later than 2 months after the end of the income year.

Note: A trustee of a trust estate that makes a choice under section 115-230 is taken to be specifically entitled to a capital gain.

(2) To avoid doubt, for the purposes of subsection (1), something is done in accordance with the terms of the trust if it is done in accordance with:

(a) the exercise of a power conferred by the terms of the trust; or

(b) the terms of the trust deed (if any), and the terms applicable to the trust because of the operation of legislation, the common law or the rules of equity.

(3) For the purposes of this section, in calculating the amount of the *capital gain, disregard sections 112-20 and 116-30 (Market value substitution rule) to the extent that those sections have the effect of increasing the amount of the capital gain.