In the event of distribution of other than a prior taxed amount, it is necessary to classify the source of distributed amount or property. If it is a tax preferred amount under the capital gains tax, such as 50 per cent of a taxable capital gain shielded from tax by operation of the general discount rules, or under the small business asset rules, then it is not taxed again on distribution. If the distribution is in consideration of the termination or reduction of a member's interest, then it is not taxed on distribution to the extent that it is the return of contributed capital of the member. But in any other case, the distribution is taxable to the recipient member to the extent that it is to be allocated against taxable profits as source. The notion of taxable profits is not to be confused with the taxable income of the trust.
Taxable profits are a creature of deduction.
Taxable profits means the net market value of the assets of the trust, as reduced by the aggregate of contributed capital in the trust, specified accounting provisions, and prior taxed amounts retained in the trust. That is, a distribution may be taxable to the extent that it reflects unrealised capital gains in trust assets. For this reason, the measures have been criticised as amounting to a tax on wealth rather than income, and also as providing for double taxation, to the extent that there would be a further tax impost on eventual realisation of those capital gains. A most significant variable in the equation for taxing distributions will be contributed capital. In those cases, there is little shelter from the taxing rules on distribution.