Private ruling: Investment in managed investment scheme
Published: August 2014
Ruling period: Year ended 30 June 2013

Ruling: Q1: Do the proceeds of redemption of your units in the trust at maturity comprise a trust distribution which is assessable income under section 97 of the Income Tax Assessment Act 1936 (ITAA 1936) for the year ended 30 June 2013? | A1: No | Q2: Are all the proceeds in respect of the redemption of your units in the trust at maturity capital proceeds from CGT event C2 in section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997) and therefore relevant in determining whether or not you make a capital gain or loss for the year ended 30 June 2013? | A2: Yes

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Through a Product Disclosure Statement you were invited to apply for units in one or more registered managed investment schemes. You purchased units in one of the managed investment schemes (the trust) and borrowed money under a loan from an associate of the managed investment scheme responsible entity to fully fund the issue price, of the units. Each unit in the trust conferred an equal and undivided interest in the assets of the trust subject to the liabilities of the trust. On exiting the investment you were required, in addition to repaying the principal borrowed under the loan, to pay a further amount to the lender (a 'premium') which was calculated by reference to the forward exchange rate between the Australian dollar and an applicable foreign currency which prevailed as at the date you acquired your units. Your investment in the trust was capital protected to the extent that the value of your units upon their redemption at maturity would be at least enough to meet your obligation to repay both the loan principal and the premium. At or around maturity of your investment you received a letter from the responsible entity confirming that proceeds from the maturity of your units in the trust will be applied towards the loan used to fund your investment in the trust. That letter also confirmed that both your unit proceeds at maturity and your loan repayment were the same amount. You did not elect to have Division 230 of the ITAA 1997 dealing with the taxation of financial arrangements apply to your investment. You held your units in the trust on capital account.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 97 | Income Tax Assessment Act 1936 paragraph 97(1)(a) | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 paragraph 104-25(1)(a) | Income Tax Assessment Act 1997 subsection 104-25(3) | Income Tax Assessment Act 1997 subsection 108-5(1) | Income Tax Assessment Act 1997 section 110-25 | Income Tax Assessment Act 1997 section 110-55 | Income Tax Assessment Act 1997 Division 115 | Income Tax Assessment Act 1997 section 115-5 | Income Tax Assessment Act 1997 section 116-20

Reasons for decision: Summary: Where a beneficiary who is not under a legal disability is presently entitled to a share of the income of a trust estate, paragraph 97(1)(a) of the ITAA 1936 requires the beneficiary to include in their assessable income that share of the trust's net income. As a beneficiary of the trust, you were assessable under section 97 of the ITAA 1936 on so much of that share of the net income of the trust estate to which you were presently entitled. Your present entitlement was reflected in your rights to receive income derived by the trust in which you had an interest, proportionate to the number of units you held in the trust. The amount in question reflects an increase in the value of your units over the term of your investment and equalled the amount of the premium payable by you to the lender under the loan at maturity, thus ensuring the value of your units upon their redemption were at least enough to meet your obligation under the loan. The relevant amount therefore formed part of the proceeds to which you were entitled for the redemption of your units, and was not a distribution of the trust's net income in respect of which you were assessable under section 97 of the ITAA 1936. Under subsection 108-5(1) of the ITAA 1997 a CGT asset is any kind of property or a legal or equitable right that is not property. The units in the trust issued to you are CGT assets according to the definition in subsection 108-5(1) of the ITAA 1997. Upon the redemption of your units in the trust your ownership of those units ended. This redemption of the units gave rise to CGT event C2 (paragraph 104-25(1)(a) of the ITAA 1997). You will make a capital gain from this CGT event if the capital proceeds from the ending of the ownership of your units are more than the cost base of the units or, alternatively, a capital loss from this CGT event if those capital proceeds are less than the reduced cost base of the units (subsection 104-25(3) of the ITAA 1997). The capital proceeds under section 116-20 of the ITAA 1997 from this CGT event C2, relevant in determining your capital gain or capital loss in relation to the units for the year ended 30 June 2013, will be the amount of proceeds you were entitled to receive from the trust for the redemption of your units. Pursuant to sections 110-25 and 110-55 of the ITAA 1997, the cost base and the reduced cost base of your units in the trust will include the amount you paid to acquire the units and any incidental costs, less any non-assessable trust distributions received by you from the trust over the term of the investment. Division 115 allows a taxpayer a discount on capital gains in certain circumstances. In accordance with section 115-5, any capital gain realised by you as a result of the redemption of your units in the trust will be treated as a discount capital gain.

Does Part IVA apply to this ruling?: Part IVA of the ITAA 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.