ATO ID 2012/63: Capital gains tax - CGT event E4 and expenses deductible for taxation purposes in a different year to that for trust law purposes.
Date of decision: 10 July 2012
Year of income: Year ended 30 June 2011
Business line: Office of the Chief Tax Counsel Assets and Mining

Issue
Does CGT event E4 in section 104-70 of the Income Tax Assessment Act 1997 (ITAA 1997) happen if a unit holder receives a distribution of trust income for an income year which exceeds the trust's net income for that year and the difference results from an expense being deductible for taxation purposes in that year which was properly charged against income for trust law purposes in an earlier income year?

Decision
Yes. CGT event E4 in section 104-70 of the ITAA 1997 does happen. This is because the amount of trust income which exceeds the trust's net income for that year is not included in the unit holder's assessable income either for the income year in which the distribution is made or for the earlier income year (in which the trust net income exceeded the trust income as a result of the expense being recognised for trust law purposes in that year).

Facts
A resident taxpayer owns units in a resident unit trust ('the trust'). The trust deed for the trust requires the trustee to distribute to the unit holders before the end of each income year so much of the trust income as remains after provision has been made for those expenses of the trustee that are properly chargeable against income. In the year ended 30 June 2009, the net income of the trust ($11M), calculated under section 95 of the Income Tax Assessment Act 1936 (ITAA 1936), exceeded the income of the trust that was available for distribution to the unit holders ($7M). Part of this difference related to certain expenses that were properly chargeable against trust income for that year but were not deductible for tax purposes in that year. In the year ended 30 June 2011, those expenses became deductible for tax purposes which resulted in the income which was available for distribution to the unit holders ($10M) exceeding the net income of the trust ($8M) for that year.

Reasons for decision
Summary: CGT event E4 in section 104-70 of the ITAA 1997 happens to a unit holder in a trust if the trustee makes a payment to the unit holder in respect of their unit and some or all of the payment is not included in the unit holder's assessable income. The effect of the trust deed in this case is that the taxpayer will be presently entitled to a share of the income of the trust for an income year if there is income available for distribution for that year. This means that the taxpayer will be presently entitled to a share of the income of the trust for both the 2009 and 2011 income years. Where a beneficiary is presently entitled to a share of the income of a trust, section 97 of the ITAA 1936 requires the beneficiary to include in their assessable income the corresponding share of the net income of the trust for that year. As the income of the trust for the 2009 income year is less than the net income of the trust for that year, the amount assessed to the taxpayer under section 97 of the ITAA 1936 will exceed the amount that is distributed to the taxpayer. However, in relation to the 2011 income year, the net income of the trust is less than the trust income with the result that that the taxpayer will not be assessed under section 97 of the ITAA 1936 on the total distribution received. As some of that distribution for the 2011 income year has not been included in the taxpayer's assessable income under section 97 of the ITAA 1936, the requirements for CGT event E4 to happen are satisfied. The fact that the taxpayer was assessed on an amount of net income in relation to the 2009 income year which exceeded the total amount that was distributed for that year is not relevant to the question of whether CGT event E4 happens in relation to the 2011 income year as the excess trust income distributed in the 2011 income year is not the same amount as that which was assessed to the taxpayer in relation to the 2009 income year. The excess trust income distributed in the 2011 income year constitutes trust income that was only derived by the trustee during that income year. It follows therefore that this excess trust income could not be the same amount as that which was assessed to the taxpayer in relation to the 2009 income year.

Legislative references: Income Tax Assessment Act 1936 section 95 section 97
Subject references: Capital gains Capital gains tax CGT events CGT events E1-E9 - trusts Non assessable part Present entitlement Trust distributions Trust income