Private ruling: Release of unpaid present entitlements
Date of advice: 24 September 2020
Published: November 2020
Ruling period: Income year ended 30 June 20XX
Date scheme commenced: During the income year ended 30 June 20XX

Ruling: Q1: Does the release of various unpaid present entitlements owing to Company Z constitute a commercial debt forgiveness for the purposes of Division 245 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Does the release of various unpaid present entitlements owing to Company Z constitute a payment for the purposes of Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936)? | A2: Yes | Q3: Does the Commissioner consider that the trustee of the Family Trust will derive a financial benefit as a result of the release of the unpaid present entitlements owing to Company Z for the pre 16 December 2009 entitlements? | A3: No | Q4: Does the Commissioner consider that the trustee of the Family Trust will derive a financial benefit as a result of the release of the unpaid present entitlements owing to Company Z for the 2013 Unpaid Present Entitlement held on sub-trust? | A4: No | Q5: Will there be a deemed dividend for the purposes of Division 7A of the ITAA 1936 for a release of the Pre 16 December 2009 unpaid present entitlements owing to Company Z by the trustees of the Family Trust? | A5: No | Q6: Will there be a deemed dividend for the purposes of Division 7A of the ITAA 1936 for a release of the 2013 Unpaid Present Entitlement owing to Company Z held on sub-trust? | A6: No | Q7: Is interest applicable up to the date of release of the 2013 unpaid present entitlement that is held on sub-trust if the release occurs after 2 July 2020 but prior to 14 May 2021? | A7: Yes | Q8: Will the release of the unpaid present entitlements owing to Company Z trigger a capital gain for the purposes of Part 3-1 of the ITAA 1997? | A8: Yes. However, in accordance with section 118-20 of the ITAA 1997, any capital gain will be reduced to the extent that income, in respect of the unpaid present entitlements, has previously been included in the assessable income Company Z. If those amounts reported by Company Z are greater than the capital gain, then the gain will be reduced to nil.

Relevant facts and circumstances: Individual A and Individual B are the Trustees of the Family Trust. Individual A, Individual B and Company Z are additional members of the class of general beneficiaries of the trust per the trust deed for the Family Trust. Company Z is an Australian resident private company that has operated as an investment holding company but currently has no business operations. The shares in Company Z are owned in the following proportions: · Individual A - 1 A Class Share · Individual B - 1 B Class Share · Individual A and Individual B as Trustee for the Family Trust - 1 C Class Share Company X is an Australian resident private company in which the Family Trust owns ordinary shares and B Class Shares. Individual A was one of the directors of Company X. Individual A and Individual B do not control Company X. Company X entered into liquidation and the Family Trust's shareholding in Company X has been deemed worthless by the appointed liquidator. The Family Trust also has units in the X Trust and the Trustee of the X Trust was under the control of an administrator and was deregistered. X Trust had a 1/3 interest in a partnership that held a property with an unrelated trust. That property was the only asset of the X Trust, and it was disposed of for a capital loss. The Family Trust does not have any expectancy of future financial resources from the X Trust. As at 30 June 2020 the assets of Family Trust are as follows: · Ordinary Shares in Company X - Market Value: Nil · B Class Shares in Company X - Market Value: Nil · Unsecured Loan to Company X - Market Value: Nil · Units in the X Trust - Market Value: Nil · C Class Share in Company Z - Market Value: $2 The Family Trust made a resolution to create a valid sub-trust arrangement in accordance with Option 1 of Law Administration Practice Statement PS LA 2010/4 to set aside Company Z's 2013 unpaid present entitlement for a period of seven years with interest payable at the Division 7A benchmark rate. As at 30 June 2020 the Family Trust owes the following unpaid present entitlements to Company Z: · Pre 16 December 2009 · 30 June 2013 (subject to a complying Division 7A sub-trust agreement) · 30 June 2014 (subject to a complying Division 7A sub-trust agreement) No security was provided personally by the trustees of Family Trust for the unpaid present entitlements (UPEs) owing to Company Z. Company Z is an eligible beneficiary of Family Trust and has been made presently entitled to the income of the trust in multiple prior financial years in accordance with the trustees' resolutions at the time. The entire present entitlements provided by Family Trust to Company Z have been included in Company Z's assessable income in each applicable financial year. The Family Trust has C Class Ordinary shares in Company Z with a face value of $2 as at 30 June 2020 and received a franked dividend from Company Z on 26 June 2020. This dividend reduced the outstanding 2013 and 2014 subsisting UPEs and ensured that the sub-trust interest owing for FY 2019 on the 2013 and 2014 UPEs were satisfied. A final dividend from Company Z was paid to the Family Trust on 1 July 2020 to clear the remaining balance of the 2014 subsisting UPE and the FY 2020 accrued interest on the subsisting UPEs for 2013 and 2014. Company Z's only remaining assets are the UPEs owing from the Family Trust. It has no financial resources of its own from which to declare and pay dividends to any of its shareholders moving forward. It is Company Z's intention to release the Family Trust from the obligation of paying the remaining balance of unpaid present entitlements during the year ended 30 June 2021 on the basis that the Family Trust has no current financial resources and no expectancy of future financial resources once the proposed release of the UPE to Company Z has occurred. It is intended that the Family Trust will be vested once the UPEs owed to Company Z are released, however the vesting date will be contingent on the finalisation of the liquidation of Company X. Individual A and Individual B do not control any other entities other than a self-managed superannuation fund. Company Z is currently the trustee of the self-managed superannuation fund mentioned above. Individual A and Individual B are currently investigating options to change the trustee of the superannuation fund so that Company Z can also be wound up.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 95(1) | Income Tax Assessment Act 1936 Division 6 | Income Tax Assessment Act 1936 Division 7A | Income Tax Assessment Act 1936 section 109C | Income Tax Assessment Act 1936 subsection 109C(3) | Income Tax Assessment Act 1936 paragraph 109C(3)(a) | Income Tax Assessment Act 1936 paragraph 109C(3)(b) | Income Tax Assessment Act 1936 section 109F | Income Tax Assessment Act 1936 subsection 109N(2) | Income Tax Assessment Act 1936 Subdivision EA | Income Tax Assessment Act 1936 section 109XA | Income Tax Assessment Act 1936 section 109XB | Income Tax Assessment Act 1997 subsection 108-5(1) | Income Tax Assessment Act 1997 subsection 110-25(2) | Income Tax Assessment Act 1997 section 112-20 | Income Tax Assessment Act 1997 subsection 112-20(1) | Income Tax Assessment Act 1997 subsection 112-20(2) | Income Tax Assessment Act 1997 subsection 112-20(3) | Income Tax Assessment Act 1997 section 116-20 | Income Tax Assessment Act 1997 section 116-30 | Income Tax Assessment Act 1997 subsection 116-30(3A) | Income Tax Assessment Act 1997 section 118-20 | Income Tax Assessment Act 1997 subsection 118-20(2) | Income Tax Assessment Act 1997 Division 245 | Income Tax Assessment Act 1997 section 245-10

Reasons for decision: Summary: The release of various unpaid present entitlements owing to Company Z will not constitute a commercial debt forgiveness for the purposes of Division 245 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Division 245 of the ITAA 1997 applies when a commercial debt (or part of a commercial debt) is forgiven. Division 245 of the ITAA 1997 was rewritten into the ITAA 1997 commencing 1 July 2010. It applies to debts forgiven from the 2010-11 income year onwards. | Detailed Reasoning - Commercial debt: Section 245-10 of the ITAA 1997 stipulates that a debt will be a 'commercial debt' if: (a) the whole or any part of interest, or of an amount in the nature of interest, paid or payable by you in respect of the debt has been deducted, or can be deducted, by you; or (b) interest, or an amount in the nature of interest, is not payable by you in respect of the debt but, had interest or such an amount been payable, the whole or any part of the interest or amount could have been deducted by you; or (c) interest or an amount mentioned in paragraph (a) or (b) could have been deducted by you apart from the operation of a provision of this Act (other than paragraphs 8-1(2)(a), (b) and (c) of the ITAA 1997) that has the effect of preventing a deduction. To determine whether a commercial debt exists we have to look at the borrower's purpose and not that of the lender ( Federal Commissioner of Taxation v Tasman Group Services Pty Ltd 2009 ATC). If the use of the loan could result in an allowable deduction of interest, were interest to be charged, a commercial debt exists. There is a distinction between a debt and an obligation in equity, which is important in the context of interests in trusts. It has been held that a declaration by the trustee of a discretionary trust that an amount of the income of a trust will be distributed to a particular beneficiary does not, in itself, give rise to a debt owing from the trustee to the beneficiary: R v Brown [1912] HCA 6; 14 CLR 17, Fischer v Nemeske Pty Ltd [2015] NSWCA 6. Rather, the declaration of a distribution gives rise to a right of the beneficiary to make a claim against the trustee for relief in a court of equity if the declared distribution is not paid. This means that an unpaid present entitlement (UPE) is not a debt. Taxation Ruling TR 2010/3 Income tax: Division 7A loans: trust entitlements (TR 2010/3) providers further guidance on this issue and paragraph 34 states that when a beneficiary is presently entitled to an amount from a trust estate, it has an equitable right to that amount. That is, the beneficiary has rights in equity and not, without more, as a result of any debtor-creditor relationship. In this case, there are 2013 UPE balance held on sub-trust and pre 16 December 2009 UPE balances. The 2013 UPE balance held on sub-trust for the sole benefit of Company Z constitutes a subsisting UPE which remains nothing more than an equitable obligation on the trustee of the sub-trust for the entitlement owing to Company Z. In situations where a UPE has not been converted into a loan, such as those discussed in TR 2010/3, a UPE does not constitute a debt. Accordingly, as the trustee is not a debtor, the release by a beneficiary of their equitable right to the UPE in the present circumstances will not be forgiveness of a debt by the beneficiary. Therefore, neither UPE entitlement creates the necessary debtor/creditor relationship to constitute a common law debt owing to Company Z. Accordingly, the subsisting UPE balances owing to Company Z are not debts for the purposes of Division 245 of the ITAA 1997. | Summary: The release of various UPEs owing to Company Z will constitute a payment for the purposes of Division 7A of the ITAA 1936, to the extent that the release represents a financial benefit to the Family Trust. | Detailed Reasoning - Detailed reasoning: Taxation Determination TD 2015/20 Income tax: Division 7A: is a release by a private company of its unpaid present entitlement a 'payment' within the meaning of Division 7A of Part III of the Income Tax Assessment Act 1936? (TD 2015/20) states that a private company that releases all, or part, of its UPE credits an amount within the meaning of that word in paragraph 109C(3)(b) of the ITAA 1936. Such a crediting is taken to be a 'payment' for the purposes of subparagraph 109C(3)(b)(iii) of the ITAA 1936 to the extent that the release represents a financial benefit to an entity. Therefore, the release of various UPEs owing to Company Z will constitute a payment for the purposes of Division 7A of the ITAA 1936 to the extent that the release represents a financial benefit to the trustee of the Family Trust for the pre 16 December 2009 UPEs and the trustee of the sub-trust for the 2013 UPEs held on sub-trust. | Summary: In accordance with TD 2015/20, the release of the pre 16 December 2009 unpaid present entitlements does not result in the Family Trust deriving a financial benefit as the Family Trust has lost the ability to satisfy the UPE due to circumstances beyond their control. Accordingly, the release of the pre 16 December 2009 unpaid present entitlement will not be treated as a payment for the purposes of Division 7A of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: TD 2015/20 explains that if the release of the UPE represents a financial benefit to the trustee, then this will amount to a payment under section 109C of the ITAA 1936 and a deemed dividend will arise under Division 7A. Should the beneficiary have a cause of action against the trustee to recover the loss, and the trustee has exposure to make good the loss that is extinguished, then it may be deemed that a financial benefit has been conferred. A beneficiary will generally only have a cause of action in equity against a trustee in breach of trust for compensation to the extent that there is a causal connection between the breach of trust and the loss to the trust estate. Paragraphs 33 to 37 of TD 2015/20 deals with release of UPE that does not give rise to benefit. Paragraph 35 of TD 2015/20 states that if a trustee has lost the ability to satisfy a UPE due to circumstances beyond their control so that the beneficiary has no cause of action against the trustee to recover that loss (examples may, in certain circumstances, include loss caused by natural disaster, an economic market fall, liquidation of a debtor, or fraudulent or criminal actions of a third party), the release of the UPE does not confer a financial benefit on the trustee. This is because the release confers nothing upon the trustee of a monetary value that is capable of being enjoyed. In this case, the Family Trust invested in Company X, and Company X encountered financial difficulties and ultimately entered into liquidation (at least 7 years after the present entitlements occurred). At the time that the present entitlements arose, the trustees believed that they had sufficient assets to meet the obligations of the trust. However, once the Liquidator of Company X deemed the company to be worthless, the trustee no longer had sufficient assets to satisfy the pre 16 December 2009 entitlements. Therefore, the trustee no longer has any capacity to pay the UPE because of circumstances beyond the trustee' s control, being the liquidation of a debtor, rather than through some breach of trust on the part of the trustee. Where there is no fault on the part of the trustee so that the beneficiary does not have a cause of action against the trustee for the loss, then TD 2015/20 provides that the UPE can be released without giving rise to a payment under section 109C of the ITAA 1936. Accordingly, the release of the pre 16 December 2009 UPE will not be treated as a payment for the purposes of Division 7A of the ITAA 1936 as the Family Trust does not obtain a financial benefit as a result of the release. | Summary: In accordance with TD 2015/20, the release of the 2013 UPE held on sub-trust does not result in the Family Trust deriving a financial benefit as the Family Trust has lost the ability to satisfy the UPE due to circumstances beyond their control. Accordingly, the release of the 2013 UPE will not be treated as a payment for the purposes of Division 7A of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: As detailed in Question 3 above, the release of the 2013 UPE will not be treated as a payment for the purposes of Division 7A of the ITAA 1936. The Family Trust's investment in Company X was deemed worthless by a Liquidator as a result of financial difficulty experienced by the group. As this was the most significant asset held by the Family Trust, the deeming of the company as worthless resulted in the trustees of Family Trust, for reasons outside of their control, being unable to satisfy the loan owing to the trustee of the sub-trust. Consequently, the trustee of the sub-trust is unable to satisfy the subsisting UPE from 30 June 2013 owing to Company Z. In the circumstances of this case, it is not considered that Company Z has no cause of action against the trustee of the sub-trust for the loan to the main trust. The release of the UPE will not confer a financial benefit as the trustee of the sub-trust has no capacity to satisfy the entitlement owing to Company Z. The loan from the sub-trust to the main trust was unsecured and no security was provided by the trustee personally in relation to the UPE. Accordingly, the release of the remaining balance of the 2013 UPE will not be treated as a payment for the purposes of Division 7A as the trustee of the sub-trust does not obtain a financial benefit of any kind as a result of the release. | Summary: The release of the pre 16 December 2009 UPE will not be treated as a payment for the purposes of Division 7A of the ITAA 1936. Accordingly, there is no deemed dividend for the purposes of Division 7A. | Detailed Reasoning - Detailed reasoning: Under Subdivision EA of the ITAA 1936, a deemed dividend for the purposes of Division 7A may arise where a private company is presently entitled to income of a trust but that income has not been paid and the trustee shifts value from the trust to a shareholder of a private company (or an associate of the shareholder) in the form of a payment, loan or forgiven debt. Pursuant to paragraph 109C(1)(a) of the ITAA 1936, a private company that makes a payment to a person is taken to pay a dividend to the person if they are a shareholder in the private company or an associate of the shareholder when the payment is made. The term "payment to an entity" is defined for the purposes of Division 7A in subsection 109C(3) of the ITAA 1936. The three types of payments under section 109C are: 1) a payment to the extent that it is to the entity, on behalf of an entity or for the benefit of the entity 2) a credit of an amount to the extent that it is to the entity, or on behalf of the entity, or for the benefit of the entity, and 3) a transfer of property to the entity. Therefore, a credit of an amount to the extent that it is to an entity, on behalf of an entity or for the benefit of the entity is taken to be a payment for the purposes of Division 7A. In TD 2015/20, the Commissioner states that a private company that releases a trustee from an obligation to pay an unpaid present entitlement effectively "credits" an amount to the trustee within the meaning of section 109C, to the extent that the release represents a financial benefit to an entity. To determine whether the release of an unpaid present entitlement represents a financial benefit to the trustee, it is necessary to consider the actual capacity of the trustee to pay the unpaid present entitlement. TD 2015/20 explains that if a trustee is unable to pay an unpaid present entitlement due to circumstances beyond its control so that the beneficiary has no cause of action against the trustee to recover the loss, then the release of the unpaid present entitlement confers no financial benefit on the trustee, and there is no "crediting" under section 109C of the ITAA 1936. In this case, the trustee no longer has any capacity to pay the UPE because of circumstances beyond the trustee' s control, being the liquidation of a debtor, rather than through some breach of trust on the part of the trustee. Where there is no fault on the part of the trustee so that the beneficiary does not have a cause of action against the trustee for the loss, then TD 2015/20 provides that the UPE can be released without giving rise to a payment under section 109C of the ITAA 1936. Accordingly, the release of the pre 16 December 2009 UPE will not be treated as a payment for the purposes of Division 7A of the ITAA 1936 as the Family Trust does not obtain a financial benefit as a result of the release. Consequently, the release of the pre 16 December 2009 UPE will not give rise to a deemed dividend for the purposes of Division 7A of the ITAA 1936. | Summary: The release of the 2013 UPE that is held on sub-trust will not be treated as a payment for the purposes of Division 7A of the ITAA 1936. Accordingly, there is no deemed dividend for the purposes of Division 7A. | Detailed Reasoning - Detailed reasoning: For the reasons explained in Question 5 above, the release of the 2013 UPE that is held on sub-trust will not give rise to a deemed dividend for the purposes of Division 7A of the ITAA 1936. | Summary: Interest will be applicable up to the date of release of the 2013 UPE that is held on sub-trust if the release occurs after 2 July 2020 but prior to 14 May 2021. | Detailed Reasoning - Detailed reasoning: Practice Statement Law Administration PS LA 2010/4 Division 7A: trust entitlements (PS LA 2010/4) provides advice on when a private company has a UPE with an associated trust. Paragraph 63 of PS LA 2010/4 states that under Option 1, the trustee must pay an annual return on the funds equal to the Benchmark interest rate and calculated as follows: > Benchmark interest rate is as defined by subsection 109N(2) of the ITAA 1936. Funds invested by the sub-trust means the funds representing the UPE that are held on sub-trust and invested back into the main trust as at the last day of the relevant income year. Days investment held in the year means the number of days during the relevant financial year in which the funds represented by the UPE are invested in the main trust by the trustee of the sub-trust not including the day the investment commences if the investment commences on the last day of the relevant income year. Therefore, interest will be applicable to up to the number of days invested (being the date of release) of the 2013 unpaid present entitlement that is held on sub-trust if the release occurs after 2 July 2020 but prior to 14 May 2021. | Summary: The release of the UPEs owing to Company Z will trigger CGT event C2 and a capital gain will occur. However, in accordance with section 118-20 of the ITAA 1997, any capital gain incurred by Company Z will be reduced to the extent that income in respect of the UPE has previously been included in the assessable income of Company Z. Pursuant to subsection 118-20(2) of the ITAA 1997, if the amounts of income in respect of the UPEs which have previously been included in the assessable income of Company Z are greater than the capital gain, then the gain will be reduced to nil. | Detailed Reasoning - Detailed reasoning: Subsection 108-5(1) of the ITAA 1997 defines a "CGT asset" as being any kind of property or a legal or equitable right that is not property. A UPE is an equitable right that is proprietary in nature in the hands of a beneficiary that is presently entitled. It therefore satisfies the definition of "CGT asset" in subsection 108-5(1) of the ITAA 1997. In the circumstances of this case, the UPE is therefore a CGT asset of Company Z. As a UPE is satisfied or discharged and ends when the amount of a beneficiary's present entitlement is released or paid to them, CGT event C2 occurs at the time of the payment. Consistent with the approach outlined in Commissioner of Taxation v Dulux Holdings Pty Ltd & Orica Ltd [2001] FCA 1344, (the Dulux case), the Commissioner's position has been that it is appropriate to look through the legal rights incidentally created and discharged/satisfied when they are merely facilitating the real transaction, being the distribution of income from a trust to a beneficiary. An equitable interest can be released for consideration or, voluntarily, without consideration. A voluntary release needs to meet particular conditions for it to be effective and statute also requires "a disposition of an equitable interest" to be in writing (where "disposition" is defined to include a release). A release of an equitable right, voluntary or for consideration, ends any right to enforcement or protection that may have previously existed and, in accordance with the doctrine of merger of estates, give the trustee absolute title to deal with the property the property the subject of the equitable interest being released. A waiver is a voluntary release and consequently an effective waiver of a UPE will trigger CGT event C2. However, a UPE that is subsequently waived cannot be considered incidental to facilitating the distribution of income from a trustee to a beneficiary. Consequently, CGT event C2 should not be ignored when a UPE is waived and any resultant capital gain should be brought to account by the beneficiary, which in this case will be Company Z. | Detailed Reasoning - Cost Base: In most cases, the cost base of a UPE will be nil for the reasons that follow. However, the cost base will need to be determined on a case by case basis and after an analysis of the circumstances and the trust deed that led to the beneficiary becoming presently entitled. Subsection 110-25(2) of the ITAA 1997 defines the first element of the cost base to be the money paid (or required to be paid) or the market value of any property given (or required to be given) in acquiring the CGT asset. As the beneficiary never has any legal right to payment of the amount of the UPE against the trustee (such as a debt), the amount of the UPE cannot be said to have been paid or given (or required to be paid or given) to the trustee, by the beneficiary, to acquire the equitable right to demand and receive payment. The market value substitution rule in subsection 112-20(1) of the ITAA 1997 modifies the general rules about cost base provided in section 110-25, by replacing the first element of the cost base and reduced cost base of a CGT asset acquired from another entity with its market value (at the time of acquisition) if: (a) the taxpayer did not incur expenditure to acquire it, except where the acquisition of the asset resulted from: (i) CGT event D1 happening; or (ii) another entity doing something that did not constitute a CGT event happening; or (b) some or all of the expenditure incurred to acquire it cannot be valued; or (c) the taxpayer did not deal at arm's length with the other entity in connection with the acquisition. Further, despite paragraph 112-20(1)(c), subsection 112-20(2) states that, if (a) you did not deal at arm ' s length with the other entity; and (b) your acquisition of the CGT asset resulted from another entity doing something that did not constitute a CGT event happening; the market value is substituted only if what you paid to acquire the CGT asset was more than its market value (at the time of acquisition). However, subsection 112-20(3) of the ITAA 1997 provides a table of situations in which the rule in subsection 112-20(1) does not apply. Item 1 of the table provides an exclusion for a right to receive income from a trust (except a unit trust or deceased estate) for no consideration and which was not acquired by way of assignment. The market value substitution rule contained in section 112-20 of the ITAA 1997 will not apply because the exclusion contained in Item 1 of the table in subsection 112-20(3) will apply. | Detailed Reasoning - Capital Proceeds: Section 116-20 of the ITAA 1997 provides that the capital proceeds from most CGT events are the total amount of money or the value of any property you receive, or are entitled to receive in respect of the event happening. As a waiver is a release without consideration, section 116-30 of the ITAA 1997 will apply to substitute the market value of the UPE at the time of waiver to be the capital proceeds received as a result of CGT event C2 occurring. Subsection 116-30(3A) of the ITAA 1997 states that if you need to work out the market value of a CGT asset that is the subject of CGT event C2, work it out as if the event had not occurred and was never proposed to occur . The market value of a UPE at the time of the CGT event will generally be the amount of the UPE. However, the determination of the market value at the time of the CGT event will need to be determined on a case by case basis. In this case, the market value of the CGT asset in respect of CGT event C2 is worked out as if the event had not occurred and was never proposed to occur. Therefore the market value of the UPE in this case will be the amount of the UPE. | Detailed Reasoning - Application of Section 118-20 of the ITAA 1997 - Waiver of a UPE: The anti-overlap provisions contained in section 118-20 of the ITAA 1997 reduce a capital gain made from a CGT event if another provision of the ITAA 1997 or the ITAA 1936 includes an amount in assessable income, for any income year, in relation to the CGT asset and that amount is also taken into account in working out the amount of the capital gain made. Accordingly, where a beneficiary's assessable income includes, in any year of income, an amount or amounts in respect of a UPE, e.g. by virtue of Division 6 or Division 7A of the ITAA 1936, any capital gain made upon subsequent waiver or assignment of that UPE will be reduced by those amount or amounts pursuant to section 118-20 of the ITAA 1997. Sub-clause 1.1(13) of the trust deed for the Family Trust defines the net income of the trust fund to be determined in accordance with section 95(1) of the ITAA 1936 and it has been advised that the entire present entitlements provided to Company Z have been included in Company Z's assessable income in each applicable financial year. Therefore, in accordance with section 118-20 of the ITAA 1997, any capital gain in this case will be reduced to the extent that income in respect of the UPE has previously been included in the assessable income of Company Z. Pursuant to subsection 118-20(2) of the ITAA 1997, if the amounts in respect of the UPEs which have previously been included in the assessable income of Company Z are greater than the capital gain, then the gain will be reduced to nil.