Capital Gains Tax Treatment of Assets Acquired by Trusts

The New Business Tax System

What is the CGT Treatment of Assets Held by Trusts?

• Prior to 1 July 2001, where a trust disposes of a CGT asset acquired at or before 11.45am AEST 21 September 1999, the trustee will have the option of choosing either the 50% discount or frozen indexation in calculating the trust’s net income (these options will continue to be available when trusts are taxed like companies).
• If the 50% discount is chosen, that part of a beneficiary’s share of the net income of the trust will be grossed up by the amount of the discount. The beneficiary will then be able to offset any capital losses and themselves claim the appropriate CGT discount (namely 50% for an individual and 33¹/₃% for a complying superannuation entity).
• If the frozen indexation option is chosen, or no CGT concession is available for the capital gain, current trust assessment rules apply, and there is no adjustment to that part of the beneficiary’s share of the net income of the trust.
• Any non-assessable amount distributed to a beneficiary of a trust will be subject to cost base adjustment rules, which only affect fixed interests in trusts. (Any capital gain arising to beneficiaries who are individuals or superannuation funds from those cost base adjustments will also be eligible for the general 50% /33¹/₃% discount rule - see below for further details).

• Where assets are acquired by a trust after 11.45am AEST 21 September 1999, held for at least 12 months and disposed of before 1 July 2001, the trust will apply the 50% discount rule. The gross-up arrangements and cost base adjustments described above will also apply.

• As noted above, if a beneficiary’s interest in the trust is not fixed, there are no CGT consequences for a beneficiary receiving a distribution out of the excluded gain amount (ie the CGT discount).
• If a beneficiary’s interest in the trust is fixed, then a cost base adjustment may apply. For example, if a trustee chooses a 50% exclusion for an asset disposed of prior to 1 July 2001, then, on distribution of the excluded amount:
  • individual beneficiaries’ cost bases will be reduced by the full excluded amount, consistent with current cost base adjustment rules.
  • superannuation fund beneficiaries will face a partial cost base adjustment.
  • for corporate beneficiaries, no cost base adjustment (as this amount has been assessed via the gross-up).

A fixed trust has three beneficiaries – an individual, a company and a superannuation fund, each with a fixed one-third entitlement to the income and capital of the trust. The trust has an asset acquired prior to 21 September 1999 which it has owned for more than a year. The cost base of the asset is $100 and the cost base with frozen indexation as at 30 September 1999 is $200. On 2 October 1999, the trust disposes of the asset for $400. The nominal gain is $300 (half of which is $150) and the indexation adjusted gain is $200. To minimise the trust’s net income, the trustee chooses the 50% discount and includes only $150 in the trust’s net income. The remaining $150 of excluded gain is also distributed equally to the beneficiaries.

• For the individual, their assessable income will include their $50 share of the trust’s net income. The cost base of their interest in the unit trust will be reduced by $50 (their share of the distributed excluded gain). If the cost base of the unit was $10, the cost base is reduced to nil and there is a capital gain of $40. If the unit was owned for at least 12 months, the individual can apply the 50% discount and reduce the gain to $20.
• For the superannuation fund, its assessable income will include its $50 share of the trust’s net income, effectively grossed up by a third – for total assessable income of $67. The cost base of its interest in the unit trust will be reduced by $33 (in respect of the $50 of excluded gain), with any capital gain arising then (or on later disposal) eligible for the 33¹/₃ % CGT discount.
• For the company, its assessable income will include its $50 share of the trust’s net income grossed up by 100% - for total assessable income of $100. No cost base adjustment is made in respect of the $50 excluded gains, as that amount has already been effectively brought to tax by the grossing up.

• On or after 1 July 2001, on the disposal of assets acquired on or before 23 December 1999, a trust will apply the 50% discount rule (or it will have the option of applying frozen indexation if the asset was acquired before 11.45am AEST 21 September 1999) in determining the trust’s assessable income. No gross up rules will apply.
• Amounts excluded from a trust’s assessable income by the discount will, on distribution to beneficiaries, be treated as a return from contributed capital of the trust, consistent with the general transitional rules for trusts that become subject to entity taxation. The profits first rule will not apply to excluded amounts distributed in the same income year as when they arose.

• Where assets are acquired by a trust after 23 December 1999 and sold on or after 1 July 2001, a trust taxed like a company will be taxed at the entity rate on any gain.
• A member will be assessable on profit distributions received from the trust, with a credit for any tax paid on the gain at the trust level.

• For trusts on or after 1 July 2001 that elect to be collective investment vehicles, a flow-through treatment will apply regardless of when an asset was purchased, with no choice of frozen indexation allowed.

• The ‘A New Business Tax System (Integrity and Other Measures) Act 1999’ covers acquisitions before or after 21 September 1999 where disposals occur prior to 1 July 2001. The Act also freezes the indexation component at 30 September 1999.
• The arrangements relating to disposals on or after 1 July 2001 are to be legislated in 2000.