Revised Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 10 - CGT: capital payments for trust interests (CGT event E4)
Outline of Chapter
10.1 A payment by the trustee to a beneficiary of a trust that is not assessable income of the beneficiary may reduce the cost base of the beneficiary's interest in the trust. The amendment in Schedule 4 to this Bill amends section 104-70 (CGT event E4) of the ITAA 1997 and inserts sections 104-71 and 104-72. These amendments take into account the effect of payments out of the CGT discount and small business CGT concessions.
Context of Reform
10.2 Under the current law a payment by a trustee of a small business 50% reduction amount is not correctly treated in calculating the non-assessable part to which CGT event E4 applies.
10.3 Schedule 4 to this Bill addresses this deficiency. This amendment was foreshadowed in the explanatory memorandum to the Capital Gains Tax Act that enacted the small business 50% reduction.
Summary of new law
10.4 Amendments were made to section 104-70 by the Integrity and Other Measures Act to take account of a payment by a trustee to a beneficiary of a CGT discount amount.
10.5 With the introduction of the new small business CGT concessions by the Capital Gains Tax Act, section 104-70 requires further amendments to deal with a payment by a trustee of the small business 50% reduction amount.
10.6 The CGT provisions contain rules to support the operation of section 104-70. These rules will apply when determining the non-assessable part of a payment to a beneficiary if the payment includes an amount out of:
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- the 50% CGT discount or frozen indexation amount;
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- the small business 50% reduction amount; or
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- both of the above.
10.7 The rules also apply where the beneficiary has applied a capital loss against their capital gain (notional gain) [F31] . Special rules apply where the beneficiary is a trustee of a fixed trust and receives a payment from another trust in a chain of trusts.
Comparison of key features of new law and current law
| New Law | Current Law |
|---|---|
| The exclusion from the non-assessable part now recognises that both the CGT discount and/or the small business 50% reduction may be claimed for a capital gain made by a trust. | The exclusion from the non-assessable part did not take account of the small business 50% reduction being claimed for a capital gain made by a trust. |
| The full amount of capital losses offset by a beneficiary against a notional gain may be excluded from the non-assessable part. | The exclusion from the non-assessable part only allowed one half of the capital losses applied to reduce the notional capital gain. |
| Payments of the CGT concession amounts to a beneficiary that is the trustee of a fixed trust in a chain of trusts are now treated appropriately. | Payments of the CGT concession amounts to a beneficiary in a chain of trusts may have resulted in an element of double taxation. |
Detailed explanation of new law
Overview of the cost base adjustment rules
10.8 Section 104-70 of ITAA 1997 reduces the cost base of a unit or fixed interest in a trust where the trustee pays a non-assessable amount to the beneficiary. If the payment is more than the beneficiary's cost base, a capital gain is made. If the beneficiary has owned the unit or interest in the trust for at least 12 months, the beneficiary may claim the CGT discount.
10.9 Section 104-70 applies to non-assessable amounts which consist of 2 elements:
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- the CGT concession amount; or
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- the return of the trust's cost base for the asset disposed of.
10.10 The following payments are CGT concession amounts:
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- the CGT discount;
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- frozen indexation; or
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- the small business 50% reduction.
10.11 The new provisions reduce the effect of section 104-70 in some cases where a CGT concession amount is paid to a beneficiary. Payments of other non-assessable amounts continue to be dealt with under section 104-70 and are not affected by the new provisions.
Treatment of a payment to a beneficiary of a CGT concession amount
10.12 These amendments recognise that section 104-70 may incorrectly calculate the non-assessable part of a payment to a beneficiary when the trustee has claimed any of the CGT concessions. Section 104-71 determines the maximum reduction (the maximum excluded amount ) necessary to reflect the difference between those CGT concessions claimed by the trustee and the CGT concessions able to be claimed by the beneficiary (the concession amount ). The concession amount also reflects capital losses claimed by the beneficiary. [Schedule 4, item 4, subsections 104-71(1) to (3)]
10.13 In effect, these rules may exclude the following amounts from the non-assessable part:
- •
- the amount of the capital gain deemed to be made by the beneficiary after allowing the beneficiary the CGT concessions;
- •
- the full amount of capital losses applied by the beneficiary in claiming the CGT concessions; and
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- any previous payments caught within CGT event E4.
10.14 If the payment is not more than the capital gain component of the income of the trust, these provisions can have no effect, as there is no non-assessable part. If the trustee has only claimed indexation of the cost base in calculating the capital gain in the trust, these provisions can have no effect, because there is no difference between the CGT concessions claimed by the trustee and those able to be claimed by the beneficiary.
10.15 The amount of the reduction depends on a comparison of the payment and the maximum excluded amount. If the payment is less than the maximum excluded amount, the non-assessable part is reduced. If the payment is more than the maximum excluded amount, these provisions have no effect, and there is no reduction of the non-assessable part. [Schedule 4, item 4, subsection 104-71(4) to (6)]
10.16 The effect of these provisions is to modify the calculation of the non-assessable part for the purposes of section 104-70 where the payment by the trustee is in the range between the concession amount for the trustee and the maximum excluded amount. It is only within this range that the provisions do not appropriately reflect the difference between the CGT concessions claimed by the trustee and those able to be claimed by the beneficiary.
10.17 Previous payments to the beneficiary from the proceeds of the trust gain to which section 104-70 applied, reduces the concession amount and the maximum excluded amount. [Schedule 4, item 4, subsection 104-71(7) to (9)]
10.18 If payments out of the concession amount pass through one or more trusts before being paid to the beneficiary at the end of the chain of trusts, there is a potential for double taxation from applying CGT event E4 to each trustee in the chain.
10.19 This inappropriate outcome is removed by disregarding the capital gain from a CGT event E4 happening to a beneficiary that is the trustee of a fixed trust, if the gain results from the payment out of the concession amount flowing through the trusts. Cost base adjustments under CGT event E4 will continue to be made. A payment out of the concession amount can only result in a capital gain under CGT event E4 if the beneficiary is not the trustee of a fixed trust. [Schedule 4, item 4, subsection 104-72]
10.20 Examples 10.1 and 10.2 illustrate how sections 104-70 and 104-71 operate where a beneficiary receives a payment out of the proceeds of a trust gain. They cover the payment of the trust gain amount attributable to the beneficiary and the payment of the capital gain component of the income of the trust attributable to the beneficiary.
Example 10.1
The Marlin Unit Trust made a capital gain of $1,800 in Year 1 that was eligible for the 50% CGT discount and the small business 50% reduction. Its net capital gain was calculated as:
Trust gain $1,800 less 50% CGT discount $900 $900 less Small business 50% reduction $450 Net capital gain $450
Peter Marlin owns one of the 3 units in the trust. The cost base of the unit, which he has owned for 5 years, is $250. Peter is presently entitled to the income of the trust in Year 1. Peter also has a capital loss of $100 in Year 1.
Peter's share of the net capital gain is $150 (1/3 of $450). His notional gain is $600(4 * $150) (paragraph 115-215(3)(c)). Peter calculates his capital gain in Year 1 as:
Notional gain $600 less Capital loss $100 $500 less 50% CGT discount $250 $250 less Small business 50% reduction $125 Net capital gain $125
The trustee pays Peter $600 in Year 2 and advises him that this amount is from the proceeds of the trust gain made in Year 1.
Peter calculates his capital gain from CGT event E4 in Year 2 as follows:
Payment received $600 less Capital gain component of the trust distribution $150 Original non-assessable part (Section 104-71 applies to this amount)
$450 less Excess of CGT concessions (CGT concessions allowed in trust ($450) less CGT concessions allowed to Peter ($375)) $75 Non-assessable part $375 less Cost base $250 $125 less 50% CGT discount $63 Capital gain $62
Example 10.2
Assume the same facts as in Example 10.1 except that the trustee pays Peter $150 in Year 2.
Peter calculates the effect of CGT event E4 in Year 2 as follows:
Payment received $150 less Capital gain component of the trust distribution $150 Original non-assessable part nil
As Peter has no original non-assessable part there is no adjustment to the cost base of his unit.
10.21 Example 10.3 illustrates how sections 104-70 to 104-72 operate where a beneficiary who is the trustee of a fixed trust in a chain of trusts, receives a payment out of the proceeds of a trust gain.
Example 10.3
Assume the same facts as in Example 10.1 except that the beneficiary of the Marlin Unit Trust is the Snapper Fixed Trust and that Peter is a beneficiary of the Snapper Fixed Trust and the cost base of his unit is $200.
Snapper Fixed Trust's share of the net capital gain is $150 (1/3 of $450). Its notional gain is $600(4 * $150) (paragraph 115-215(3)(c)). The Snapper Fixed Trust calculates its capital gain in Year 1 as:
Notional gain $600 less 50% CGT discount $300 $300 less Small business 50% reduction $150 Net capital gain $150
The trustee pays the Snapper Fixed Trust $600 in Year 2 and advises it that this amount is from the proceeds of the trust gain made in Year 1.
The Snapper Fixed Trust calculates its capital gain from CGT event E4 in Year 2 as follows:
Payment received $600 less Capital gain component of the trust distribution $150 Original non-assessable part (Section 104-71 applies to this amount)
$450 less Excess of CGT concessions (CGT concessions allowed in Marlin Unit Trust ($450) less CGT concessions allowed to Snapper Fixed Trust ($450)) nil Non-assessable part $450 less Cost base $250 Capital gain $200
The capital gain is disregarded as the beneficiary is the trustee of a fixed trust and the capital gain resulted from the payment of CGT concessions relating to a trust gain made by the Marlin Unit Trust. However, the cost base of the unit is reduced to nil.
Peter's share of the net capital gain of the Snapper Fixed Trust is $150 (1/3 of $450). His notional gain is $600(4 * $150) (paragraph 115-215(3)(c)). Peter calculates his capital gain in Year 1 as:
Notional gain $600 less Capital loss $100 $500 less 50% CGT discount $250 $250 less Small business 50% reduction $125 Net capital gain $125
The trustee of the Snapper Fixed Trust pays Peter $600 in Year 2 and advises him that this amount is from the proceeds of the trust gain made in Year 1.
Peter calculates his capital gain from CGT event E4 in Year 2 as follows:
Payment received $600 less Capital gain component of the trust distribution $150 Original non-assessable part (Section 104-71 applies to this amount)
$450 less Excess of CGT concessions (CGT concessions allowed in trust ($450) less CGT concessions allowed to Peter ($375)) $75 Non-assessable part $375 less Cost base $200 $175 less 50% CGT discount $88 Capital gain $87
Application and transitional provisions
10.21 The amendments made by this Schedule apply to assessments for the income year including 21 September 1999 and all later income years, for a CGT event happening after 11.45 am, by legal time in the Australian Capital Territory, on 21 September 1999. [Schedule 4, item 5]
Consequential amendments
10.22 Notes are added to subsections 104-70(1) and 104-70(4) referring to the provisions that affect the calculation of the non-assessable part [Schedule 4, item 1 and 2] . Subsection 104-70(7A) is repealed as sections 104-71 and 104-72 now deal with the rules contained in this subsection [Schedule 4, item 3] .
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