Private ruling: Capital gains tax outcome under section 104-70 of the Income Tax Assessment Act 1997
Date of advice: 27 September 2016
Published: February 2017
Ruling period: 1 July 20xx to 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Is any part of a payment to X Pty Ltd ATF X Trust, in respect of its unit holding in Y Trust taken into account under subsection 104-70(1) of the Income Tax Assessment Act 1997 in working out the “non-assessable part” of the payment not included in the assessable income of X Trust? | A1: Yes.

Relevant facts and circumstances: Y Pty Ltd ATF Y Trust (Y) issued, among others, one “A” class unit to X Pty Ltd ATF X Trust (X) for $X Y purchased a land (the Land) for the purpose of industrial letting. Despite numerous attempts, Y failed to let the Land Y sold the Land and made a capital gain. As per the director's resolution of Y, the entire gain was distributed to X in relation to the “A” class unit. In the relevant year, Y had a rental income and a revenue loss from a previous year. Y also had expenses in relation to the rental income that it was entitled to deduct. The Income Tax Return (ITR) lodged by Y for the relevant income year declared a total income of a certain amount consisting of net rental income and discounted capital gain. This amount was reduced by the revenue loss giving it a net income of a certain amount.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 95 | Income Tax Assessment Act 1936 section 97 | Income Tax Assessment Act 1997 section 104-70 | Income Tax Assessment Act 1997 section 104-71

Reasons for decision: Summary: All legislative references are to the Income Tax Assessment Act 1997 unless otherwise specified. The net income of a trust estate is calculated pursuant to subsection 95(1) of the Income Tax Assessment Act 1936 (ITAA 1936) as the total assessable income of the trust estate as if the trustee was a resident taxpayer less all allowable deduction. In this case, Y calculated its net income for the relevant income year consisting of revenue income, discounted capital gain and a revenue loss. Pursuant to section 97 of the ITAA 1936 (as adjusted by section 95AAB of the ITAA 1936), a beneficiary who is presently entitled to a share of the income of a trust estate and is not under a legal disability is liable to be assessed on: ● so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident of Australia, whatever the source of the income, and ● so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia. In this case, X is presently entitled to 100% of the net income of Y for the relevant year. Therefore, X's assessable income would include 100% of the net income of Y under section 97 of the ITAA 1936. Under subsection 104-70(1), GCT event E4 happens if the trustee of a trust makes a payment to a beneficiary in respect of a unit or interest in the trust that the beneficiary holds and some or all of the payment is not included in the beneficiary's assessable income, referred to as the 'non-assessable part'. Under subsection 104-70(4), the beneficiary will make a capital gain to the extent that the non-assessable part of the payment to the beneficiary exceeds their cost base in the unit or interest in the trust. To the extent that the amount of the non-assessable part is less than the cost base in the unit or interest in the trust, pursuant to subsection 104-70(5), the cost base or reduced cost base will be reduced by that amount. Furthermore, subsection 104-71(4) item 1 provides that the 'non-assessable part' referred to in section 104-70 is adjusted to exclude so much of the amount of a discount capital gain excluded from the net capital gain of the trust making the payment because of step 3 of the method statement in subsection 102-5(1) and that is reflected in the payment to the beneficiary. In this case, the payment of the capital gain was made to X as per the director's resolution of Y in respect to X's interests in Y. Of the payment, 50% represents a discount capital gain and the balance of 50% represents the discount allowed to the Y pursuant to step 3 of the method statement in subsection 102-5(1). Pursuant to section 97 of the ITAA 1936, X's assessable income as stated above includes 100% of the net income of Y. In applying section 104-70 to the payment received therefore, X would first reduce the payment by the net income assessed to X under section 97 of the ITAA 1936. The remaining balance of the payment would be further adjusted under subsection 104-71(4) item 1 by the amount of the discount allowed to Y. This results in a 'non-assessable part'. It is noted that director's resolution of Y records that the distribution to X is made under the 'A' class unit that X holds in Y. Since the payment of the 'non-assessable part' is more than the cost base of the unit in relation to which the payment was made, X makes a capital gain under CGT event E4 equal to the difference between X's cost base and the non- assessable part of the payment. In addition, the cost base of X's 'A' class unit is reduced to nil.