Peter Costello

Media Releases

Capital Gains Tax Treatment of Assets Acquired by Trusts

NO.093

Capital Gains Tax Treatment of Assets Acquired by Trusts

Today I am announcing further details on the capital gains tax (CGT) treatment of assets disposed of by trusts after 1 July 2001, the date from which trusts will be taxed like companies. This announcement will provide certainty for taxpayers about the CGT treatment for assets disposed of by trusts.

The New Business Tax System (Integrity and Other Measures) Act 1999 sets out the capital gains tax treatment of assets disposed of by trusts prior to 1 July 2001. For assets disposed of by a trust prior to 1 July 2001, the trustee is able to benefit from the CGT discount available to individuals in determining the net income of the trust (or has the option of applying frozen indexation if the asset was acquired at or before 11.45am, AEST 21 September 1999). That part of a beneficiary’s share of the net income of the trust that is attributable to a discounted gain will be grossed up by the amount of the discount before applying the CGT discount appropriate to the beneficiary. Existing cost base adjustments for distributions of non-assessable amounts (ie the discount or indexation component) apply but are modified for complying superannuation entities and companies to the extent a discounted amount has been assessed via the gross-up outlined above.

Where assets are acquired by a trust after 23 December 1999 and disposed of on or after 1 July 2001, a trust taxed like a company will be taxed at the entity rate on any gain.

For assets disposed of by a trust on or after 1 July 2001, where the assets were acquired by the trust on or before 23 December 1999, the trust will be able to benefit from the CGT discount available to individuals (or has the option of applying frozen indexation if the asset was acquired at or before 11.45am, AEST 21 September 1999) in determining the trust’s assessable income. Amounts excluded from a trust’s assessable income will, on distribution, be treated as a return of contributed capital of the trust, consistent with the general transitional rules for trusts that become subject to entity taxation.

The arrangements relating to disposals on or after 1 July 2001 are to be legislated in 2000.

The attached fact sheet provides a detailed explanation of the CGT treatment of assets acquired by trusts.

CANBERRA
23 December 1999

 

Fact Sheet

The New Business Tax System

What is the CGT Treatment of Assets Held by Trusts?

What is the treatment of assets acquired before 21 September 1999 and disposed of prior to 1 July 2001?
  • 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).
What is the treatment of assets acquired after 21 September 1999 and disposed of prior to 1 July 2001?
  • 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.
What happens if a beneficiary receives a tax-free distribution from a trust of the CGT discount that was allowed to the trustee?
  • 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).
Example:

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/% 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.
What is the treatment of assets acquired on or before 23 December 1999 and disposed of on or after 1 July 2001?
  • 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.
What is the treatment of assets acquired after 23 December 1999 and disposed of on or after 1 July 2001?
  • 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.
What will be the treatment of assets acquired by trusts that elect to be collective investment vehicles on or after 1 July 2001?
  • 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.
What is in the first tranche of legislation which has been passed by Parliament?
  • 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.
The information in this Fact Sheet is intended to tell you about the Government's response to the Review of Business Taxation, and contains general information only. You should not rely on it for advice. For advice on how the Government's announcement might affect your particular circumstances, you may wish to seek professional advice. The Commonwealth is not responsible for any action you take which relies on information in this Fact Sheet. The information in this Fact Sheet is current as at 23/12/1999.

For further information:
www.treasury.gov.au (for additional fact sheets)
www.treasurer.gov.au (for press releases)
www.rbt.treasury.gov.au (for RBT Report, Draft Legislation and Explanatory Notes)

Government Info Shops (for RBT Report, Draft Legislation and Explanatory Notes)

23 Dec 1999

View more media releases …

Latest News

Paris Diary

Peter Costello Paris Diary

Read more …

To the Brink 1997-2001 Black Holes to Surplus Budgets

Peter Costello To the Brink 1997-2001 Black Holes to Surplus Budgets

Read more …

The Hole Truth

Peter Costello in the Daily Telegraph

Read more …

Videos

Video Screenshot

Watch videos …