Outline of
chapter
2.1
Schedule 2 to this Bill amends
Subdivision 115‑C and Subdivision 207‑B of the Income Tax Assessment Act 1997
(ITAA 1997) to ensure that, where permitted by the trust, the capital
gains and franked distributions (including any attached franking credits) of a
trust can be effectively streamed for tax purposes to beneficiaries by making
them ‘specifically entitled’ to those amounts.
2.2
These amendments affect trusts that have made
capital gains or received franked distributions (including any attached
franking credits). However, where a trust has not made particular
beneficiaries specifically entitled to those amounts, these amendments
generally produce the same outcome as under the current law.
2.3
Schedule 2 also amends Division 6 of
Part III of the Income Tax Assessment
Act 1936 (ITAA 1936), hereafter referred to as
Division 6, to include specific anti‑avoidance rules to address the
potential opportunities for tax manipulation that can result from the
inappropriate use of exempt entities as beneficiaries.
2.4
The legislative references in this chapter are to
the ITAA 1997 unless otherwise specified.
Context of
amendments
2.5
On 30 March 2010, the High Court handed down its
decision in Commissioner of Taxation v
Bamford (2010) 240 CLR 481. In that case, the Court
considered the meaning of ‘income of the trust estate’ and the meaning of
‘share’ for the purposes of section 97 of the ITAA 1936.
2.6
The Court clarified that:
• ‘income
of the trust estate’ in section 97 of the ITAA 1936 refers to the distributable
income of the trust as determined according to trust law and in accordance with
the deed; and
• ‘share’
means ‘proportion’ such that once the share of the distributable income of the
trust to which the beneficiary is presently entitled is determined, the
beneficiary is assessed on that same percentage share of the trust’s net income
as defined in section 95 of the ITAA 1936 (hereafter referred to as the trust’s
‘taxable income’).
– This
interpretation of the term ‘share’ is referred to as the proportionate
approach.
2.7
This decision has highlighted a number of
longstanding problems with the taxation of trusts. In particular, it has
highlighted that the amounts on which a beneficiary is assessed do not always
match the amounts that they are entitled to under trust law. This mismatch can
result in unfair outcomes, as well as opportunities for tax manipulation.
2.8
The decision has also raised issues about how the
proportionate approach interacts with other areas of the tax law. For example,
it is not clear how the proportionate approach interacts with provisions in the
tax law that assume, or provide for, amounts (such as capital gains and franked
distributions) to have the same character in the hands of a beneficiary as they
had in the hands of a trustee.
2.9
This is because, under the proportionate approach,
the amount included in a beneficiary’s assessable income under Division 6
is the proportion of the income of the trust estate to which a beneficiary is
presently entitled applied against ‘the whole of the trust’s taxable income’.
On one view, the result of this approach is that a beneficiary includes in
their assessable income a ‘blended’ amount of all of the different types of
income and capital gains included in the trust’s taxable income.
Government
response
2.10
On 16 December 2010, in recognition of the
longstanding problems with the taxation of trusts, the Government announced a
public consultation process as the first step towards updating the trust income
tax provisions and rewriting them into the ITAA 1997.
2.11
The Government also announced that it would obtain
advice from the Board of Taxation (Board) on whether there are any issues with
the current operation of the trust income tax provisions that must be addressed
from the 2010‑11 income year as an interim measure pending the broader review
of the taxation of trust income.
2.12
On 4 March 2011, after examining the advice
provided by the Board, the Government announced that it would:
• better
align the concept of ‘income of the trust estate’ with ‘net income of the trust
estate’; and
• enable
the ‘streaming’ of capital gains and franked distributions.
2.13
The Government subsequently released the discussion
paper, Improving the taxation of trust
income for public consultation on
options to implement the Board’s recommendations.
2.14
After consulting with interested stakeholders, the
Assistant Treasurer and Minister for Financial Services and Superannuation confirmed
via Media Release No. 052 of 13 April 2011 that the Government would
defer consideration of the proposal to better align the concept of ‘income of
the trust estate’ with ‘net income of the trust estate’ until the broader
review of the taxation of trust income.
2.15
As a result of this decision, the Assistant
Treasurer and Minister for Financial Services and Superannuation also announced
(in Media Release No. 052) that specific anti-avoidance rules would be
introduced to target the use of exempt entities to inappropriately reduce the
tax otherwise payable on the taxable income of a trust. These rules are
designed to address the potential opportunities for tax manipulation that would
otherwise exist, in the interim, while the Government continues with its
broader update and rewrite of the trust income tax provisions.
2.16
Further, as a result of consultation on exposure
draft legislation, the Government has provided a carve-out for managed
investment trusts (MITs) and certain trusts treated like MITs in recognition
that these trusts generally do not ‘stream’ capital gains or franked
distributions and instead distribute all of their trust income proportionally.
This carve‑out enables MITs to use the current ‘proportional approach’ in
Division 6 until the Government’s new MIT regime commences on 1 July
2012. The trustees of these trusts can still choose to apply these amendments
provided they make a valid election for the 2010‑11 or 2011‑12 income year.
2.17
The Government also recognises that it would be
difficult for MITs to engage in the kind of tax manipulation that the specific
anti‑avoidance rules are designed to target. Therefore, those rules do not
apply to MITs (even if they choose to apply the other amendments in this
Schedule).
2.18
The Government is aware that these amendments do
not address all of the current problems and uncertainties related to the
taxation of trusts. However, these amendments address key anomalous outcomes
and provide certainty in relation to the streaming of capital gains and franked
distributions (including any attached franking credits).
2.19
The Government remains committed to considering
issues with the taxation of trusts more broadly as part of its announced update
and rewrite of the trust income tax provisions.
Summary of
new law
2.20
These amendments ensure that, for the 2010‑11 and
later income years, where a trustee has the power to appoint or ‘stream’ capital
gains and/or franked distributions (including any attached franking credits) to
specific beneficiaries this will be effective for tax purposes, subject to
relevant integrity rules.
2.21
To achieve this result, capital gains and franked
distributions are effectively taken out of Division 6 and dealt with under
Subdivision 115‑C and 207‑B respectively.
2.22
These amendments also introduce the concept of
specific entitlement to ensure that a beneficiary’s ‘share’ of the trust’s
capital gains and franked distributions (including any attached franking
credits) reflects their entitlement under the relevant trust deed.
2.23
These amendments also introduce specific anti‑avoidance
rules that prevent the inappropriate use of exempt beneficiaries to ‘shelter’
taxable income of a trust.
2.24
Broadly, the specific anti‑avoidance rules apply
where a beneficiary that is an exempt entity is not notified or paid their
present entitlement to income of the trust; or where an exempt beneficiary would
otherwise be assessed on a share of a trust’s taxable income that is
disproportionate to their overall trust entitlement.
Comparison of key features of new law and current law
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Where a
beneficiary is specifically entitled to a capital gain included in the
trust’s taxable income, that beneficiary is treated as having made a capital
gain (or a trustee is assessed and liable to pay tax on their behalf on an
equivalent amount).
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Net capital
gains form part of the trust’s taxable income assessed under
Division 6. In addition, so much of the amount assessed to a
beneficiary under Division 6 that is attributable to a capital gain of
the trust forms the basis of an extra capital gain taken to be made by that
beneficiary under Subdivision 115‑C.
Beneficiaries
entitled to property of the trust representing a capital gain but who are not
entitled to any income of the trust estate are not taken to have made such a
capital gain.
Special
rules also apply to trustees assessed under Division 6.
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A trustee of
a resident trust can choose to be assessed on a capital gain of the trust if
no amount of trust property referable to the capital gain is paid or applied
for the benefit of a beneficiary.
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A trustee of
a resident testamentary trust can choose to be assessed on a capital gain of
the trust if the capital gain would otherwise be assessed to a beneficiary
who cannot benefit from it (or the trustee would be assessed and liable to
pay tax on behalf of such a beneficiary).
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Where a beneficiary is specifically entitled to a
franked distribution, that beneficiary (or a trustee assessed and liable to
pay tax on their behalf) is assessed on the amount of the franked
distribution included in the taxable income of the trust estate and on the
franking credits attached to that distribution.
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Franked distributions and their attached franking
credits form part of the taxable income of the trust assessed under
Division 6. Subdivision 207‑B contains rules for working out
beneficiaries’ (and, where relevant, the trustee’s) share of the attached
franking credits.
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Amounts otherwise assessable to beneficiaries (and,
where relevant, the trustee) under Division 6 are adjusted to ensure that capital
gains, franked distributions and franking credits dealt with under
Subdivision 115‑C and 207‑B respectively are not taxed twice.
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Double taxation is avoided in respect of extra
capital gains calculated under Subdivision 115‑C through the deduction
provided for by subsection 115‑215(6).
Whilst subsection 207-35(3) is said to operate
‘despite’ Division 6, Subdivision 207‑B contains no equivalent to
subsection 115‑215(6).
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An exempt
entity is taken not to be
presently entitled to any amount of the trust’s income unless they have
either been paid or notified of their entitlement, within two months of the
end of the income year.
The amount
that would otherwise be that beneficiary’s share of taxable income is
assessed to the trustee.
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No equivalent.
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Where an exempt entity is used to ‘shelter’ a share
of the taxable income of a trust that exceeds the exempt entity’s entitlement
to the net accretions to the trust underlying that taxable income (whether ‘income’
or ‘capital’ of the trust), that excess is assessed to the trustee.
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An exempt entity can be made presently entitled to
all of the income of a trust estate (as calculated under trust law) resulting
in the trust’s total taxable income becoming exempt — even where the entity
is not entitled to receive all of the net taxable accretions to the trust
underlying that taxable income (whether ‘income’ or ‘capital’ of the trust).
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Detailed
explanation of new law
2.25
The primary purpose of these amendments is to ensure
that, where permitted by a trust deed, the ‘streaming’ of capital gains and
franked distributions to beneficiaries (by making them specifically entitled to
those amounts) is effective for tax purposes.
2.26
To achieve this goal, the taxation of a trust’s
capital gains and franked distributions (including attached franking credits)
is effectively taken out of Division 6 and dealt with under
Subdivisions 115‑C and 207‑B.
2.27
These amendments do not apply to a MIT unless the
MIT opts in to the amendments (see paragraphs 2.208 to 2.212).
2.28
For trusts with no capital gains and no franked
distributions, the streaming amendments have no effect. However, the specific
anti‑avoidance rules may still apply. [Schedule 2, item 7, section 102UW
of the ITAA 1936]
2.29
For trusts that have capital gains or franked
distributions but do not stream them to specific beneficiaries, the amendments
apply but they will generally produce the same outcome as the current law.
• There
is a minor improvement to the way double taxation is avoided for capital gains
(see paragraph 2.80).
2.30
This part of the explanatory memorandum explains:
• the
order in which to apply the new provisions (see paragraphs 2.31 to
2.34);
• when
streaming of capital gains and franked distributions will be effective for tax
purposes and what is required for a beneficiary to be ‘specifically entitled’
to these amounts (see paragraphs 2.35 to 2.70);
• calculating
the ‘adjusted Division 6 percentage’ for the purposes of Subdivisions 115‑C and
207‑B (see paragraphs 2.71 to 2.75);
• the
treatment of capital gains under Subdivision 115‑C
(see paragraphs 2.76 to 2.113);
• the
treatment of franked distributions and franking credits under
Subdivision 207‑B (see paragraphs 2.114 to 2.149);
• the
application of new Division 6E of the ITAA 1936 (hereafter referred
to as Division 6E) to adjust the assessable amounts under Division 6 (see
paragraphs 2.150 to 2.164);
• the
combined effect of the streaming amendments
(see paragraphs 2.165 to 2.169); and
• the
specific anti-avoidance rules for exempt entities that are used to ‘shelter’
taxable income of a trust disproportionately to their entitlements (see
paragraphs 2.170 to 2.202).
The order in
which to apply the provisions
2.31
As is currently the case, Division 6 is the
starting point for the taxation of trust income. Broadly, Division 6 makes
beneficiaries assessable on a share of a trust’s taxable income based on their
share of the income of the trust estate. It also generally assesses the
trustee on any residual taxable income where there is part of the trust’s
income to which no beneficiary is presently entitled. If the trust has no
(net) taxable income or no capital gains and no franked distributions, the
trustee (and beneficiaries) need go no further. [Schedule 2, item 1, section 95AAA
of the ITAA 1936]
2.32
The next step is to determine amounts of capital
gains and franked distributions to which beneficiaries are specifically
entitled — and each beneficiary’s ‘adjusted Division 6 percentage’ of
the remaining income of the trust estate. These concepts are used to calculate
each beneficiary’s ‘share’ of the trust’s capital gains and franked
distributions. Generally, if no capital gains or franked distributions have
been streamed to specific beneficiaries, each beneficiary’s adjusted
Division 6 percentage will be the same as their original Division 6
percentage of trust income.
2.33
Third, the amended Subdivisions 115‑C
and 207‑B apply to assess beneficiaries (or the trustee) on their ‘share’
of any capital gain made or franked distributions derived by the trustee. It
does not matter which Subdivision you apply first. Technically, the two
Subdivisions operate simultaneously.
2.34
Finally, Division 6E applies to adjust the
amounts otherwise assessed to a beneficiary (or the trustee) under Division 6.
In effect, you calculate these Division 6 assessable amounts assuming the
trust had no capital gains or franked distributions. However, for trustee
assessments, Division 6E does not affect the amounts brought to tax under
Subdivisions 115‑C and 207‑B.
When
‘streaming’ is effective for tax purpose — ‘specifically entitled’
2.35
These amendments ensure that where a trustee has a
power to stream under the terms of the trust, the streaming will be effective
for tax purposes. These amendments do not in any way give trustees a power to stream where they
do not already have the power to do so.
2.36
Existing integrity rules in Subdivision 207‑F
(such as the ‘qualified person’ rules) continue to apply in respect of the
streaming of franked distributions — particularly to determine whether the
beneficiary can receive the benefit of franking credits.
2.37
For streaming of capital gains and franked
distributions to be effective for tax purposes, beneficiaries must be
specifically entitled to them. That is:
• the
beneficiary must receive, or reasonably be expected to receive, an amount equal
to the ‘net financial benefit’ referable to the capital gain or franked
distribution in the trust; and
• the
entitlement must be recorded in its character as such in the accounts or records
of the trust (see paragraph 2.62).
[Schedule 2, item 11, section 115‑228,
item 24, section 207-58 and item 27, subsection 995-1(1)]
2.38
Broadly, a beneficiary will be specifically
entitled to the fraction of the (gross) tax
amount that equals their fraction of the net trust
amount referable to the capital gain or franked distribution. For example, a
beneficiary that receives an amount specified to be half of the trust’s profit
from the sale of an asset will generally be specifically entitled to half of
the (tax) capital gain realised on the asset. [Schedule 2, item 11,
subsection 115‑228(1) and item 24, subsection 207-58(1)]
2.39
When a beneficiary has a specific entitlement to a
capital gain or franked distribution, the associated tax consequences in
respect of that distribution will apply to that beneficiary. Furthermore, the
beneficiary will not be assessed on any share of the trust’s taxable income over
and above the amounts assessed because of Subdivisions 115‑C and 207‑B.
2.40
Capital gains and franked distributions to which no
beneficiary is specifically entitled will flow proportionally to beneficiaries
and/or the trustee based on their share of income of the trust excluding amounts to which any beneficiary
is specifically entitled. This ‘adjusted Division 6 percentage’ is
explained further in paragraphs 2.71 to 2.75.
The
meaning of ‘receive or reasonably be expected to receive’
What
must the beneficiary receive or reasonably be expected to receive?
2.41
A beneficiary must receive, or reasonably be
expected to receive, an amount equal to their ‘share of the net financial
benefit’ that is referable to the capital gain or franked distribution. [Schedule 2, item 11,
subsection 115‑228(1)
and item 24, subsection 207-58(1)]
2.42
This does not require an ‘equitable tracing’ to the
actual trust proceeds from the event that gave rise to a capital gain or the
receipt of a franked distribution. For example, it does not matter that the
proceeds from the sale of an asset or a franked distribution were re‑invested
during the year, provided that a beneficiary receives (or can be expected to
receive) an amount equivalent to their share of the net financial benefit.
2.43
The entitlement can be expressed as a share of the
trust gain or distribution. More generally, the entitlement can be expressed
using a known formula even though the result
of the formula is calculated later. For example, a trustee could resolve to
distribute to a beneficiary:
• $50
referable to a franked distribution;
• half
of the ‘trust gain’ realised on the sale of an asset;
• the
amount of franked distribution remaining after calculating directly relevant
expenses and distributing $10 to another beneficiary;
• thirty per cent
of a ‘net dividends account’ that includes all franked and unfranked
distributions, less directly relevant expenses charged against the account (so
long as their entitlement to net franked
distributions can be determined); and
• the
amount of (tax) capital gain included in the calculation of the trust’s taxable
income remaining after the application of the capital gains tax (CGT) discount.
(In such a case the beneficiary would generally be specifically entitled to only
half of the gain, and that entitlement is taken to be made up equally of the
taxable and discount parts of the gain.)
When
a beneficiary has received or can reasonably be expected to receive
2.44
A beneficiary has received an amount when, for
example, it has been credited or distributed to them (including under a re‑investment
agreement), or paid or applied on their behalf or for their benefit.
2.45
A beneficiary can reasonably be expected to receive
an amount if, for example, the beneficiary has a present entitlement to the
amount; a vested and indefeasible interest in trust property representing the
amount; or, the amount has been set aside exclusively for the beneficiary. In
other words, even if the beneficiary is not ‘presently entitled’ to the trust
amount, it is reasonable to expect that the beneficiary will become entitled to it.
Example 2.1
In June 2011, the Straddle Trust signed a contract for
the sale of a property for $500,000 with a settlement date in October 2011.
The trustee purchased the property in 2006 for $300,000.
Upon settlement of the contract, the trustee will be
taken to have made a capital gain at the time when the contract was entered into.
Therefore, the trust will have a capital gain of $200,000 in the 2010‑11 income
year.
In accordance with the trust deed, in July 2011 the
trustee resolves to distribute all of the trust profit on the sale to Bob upon
settlement.
Bob can reasonably be expected to receive the trust
profit on the sale of the asset and is specifically entitled to the capital
gain for the purposes of the 2010‑11 income year.
2.46
A notional allocation of an amount by a trustee to
a beneficiary (for example, in the trust’s tax records) is not sufficient
because there is no reason to reasonably expect that the beneficiary will
receive the amount.
‘Net
financial benefit’
2.47
A net financial benefit is the ‘financial benefit’ or
actual proceeds of the trust (irrespective of how they are characterised)
reduced by (trust) losses or expenses (subject to certain conditions explained
below). [Schedule 2, item 11,
subsection 115‑228(1) and item 24,
subsection 207‑58(1)]
Financial
benefit
2.48
Financial benefit is defined in existing section 974‑600
to mean anything of economic value (including property and services). It
includes a receipt of cash or property, an increase in the value of units in a
unit trust, the forgiveness of a debt obligation of the trust or any other
accretion of value to the trust.
Reduced
by losses or expenses
2.49
These amendments do not impose any rules on how
trustees can apply losses within the trust generally. However, for the
purposes of determining specific entitlement, there are conditions on which
(trust) losses or expenses can be taken into account to reduce the (gross)
financial benefit.
2.50
When determining a beneficiary’s
fraction of the net financial benefit referable to a ‘capital gain’, the (gross)
financial benefit referable to the gain is reduced by trust losses or expenses only to the
extent that tax capital losses
were applied in the same way. [Schedule 2, item 11, subsection 115-228(1)]
2.51
When determining a beneficiary’s fraction of the
net financial benefit referable to a ‘franked distribution’, the (gross)
financial benefit is reduced by directly
relevant expenses only. [Schedule 2, item 24, subsection 207-58(1)]
Example 2.2
A trust sells Asset A for a gain of $1,000 and Asset B
for a gain of $2,000. The trust also sells another asset for a capital loss of
$500. (The amounts are the same for trust and tax purposes.)
The trustee resolves to distribute $500 to Jo,
recorded as referable to the gain on Asset A after being reduced by the capital
loss, and $2,000 to Tanya, recorded as referable to the gain on Asset B.
However, for tax purposes, the trustee applies the capital loss against the
capital gain on Asset B.
Therefore, the net financial benefit referable to the
capital gain on Asset A is $1,000, and Jo is only specifically entitled to half
of the capital gain.
The net financial benefit referable to the capital
gain on Asset B is $2,000 (because the trustee did not apply any trust losses against the trust gain) and Tanya is specifically
entitled to all of the capital gain.
Exception
for capital gains and the market value substitution rule
2.52
No beneficiary can be specifically entitled to the
part of a (tax) capital gain that arises because of the market value
substitution rules in sections 112‑20 and 116‑30. In these cases,
the amount of specific entitlement is limited to what the (tax) capital gain
would have been if the market value substitution rules did not apply. [Schedule 2, item 11,
subsection 115‑228(3)]
Referable
to a capital gain or franked distribution
2.53
The net financial benefit referable to a franked
distribution will normally equal the amount of the franked distribution after
being reduced by directly relevant expenses. Directly relevant expenses could
include any annual borrowing expenses (such as interest) incurred in respect of
the underlying shares (allocated rateably against any franked and unfranked
dividends from those shares) or management fees incurred in respect of managing
an investment portfolio of shares for the purpose of deriving dividend income
(allocated against dividend income as relevant). [Schedule 2, item 24, subsection 207‑58(1)]
2.54
The net financial benefit referable to a capital
gain will generally be the trust proceeds from the transaction or circumstances
that gave rise to the CGT event, reduced by any costs incurred in relation to
the relevant asset. This may be further reduced by other trust losses of a
capital nature (to the extent consistent with the application of capital losses
for tax purposes). [Schedule 2, item 11, subsection 115‑228(1)]
2.55
What matters is the financial benefit to the trust
over the life of the relevant asset, not just in the year of the CGT event.
Example 2.3
The Zhang Trust buys an investment property in 2001
for $100,000. The trustee of the trust has the power to revalue the property
according to generally accepted accounting principles and treat any increase in
its value as income of the trust.
Each year for the following 10 income years, the
trustee revalues the asset upwards by $20,000 and treats this amount as income
of the trust. For each of the first five years, the trustee distributed
$20,000 from the revaluation to John, who is no longer a beneficiary of the
trust. For each of the remaining five years, the trustee distributed $20,000 from
the revaluation to Kevin (who is still a beneficiary of the trust).
In the 2011‑12 income year, the trustee sells the property
for $400,000. The trustee makes an accounting gain of $100,000 ($400,000 less
the revalued amount of $300,000) and a (tax) capital gain of $300,000 ($400,000
capital proceeds minus the cost base of $100,000).
The trustee distributes the $100,000 accounting gain to William.
Assuming there are no losses or expenses, the net
financial benefit referable to the gain (over the life of the asset) is
$300,000. After applying the CGT discount, the taxable capital gain is
$150,000.
Kevin received a $100,000 share of the net financial
benefit referable to the gain (in five payments of $20,000) and therefore is
specifically entitled to one third of the $300,000 capital gain.
William also received a $100,000 share of the net
financial benefit referable to the gain (one payment of $100,000) and is also
specifically entitled to one third of the $300,000 capital gain.
There is one third of the capital gain to which no
beneficiary is specifically entitled. (John cannot be specifically entitled to
any of the capital gain because he is no longer a beneficiary.)
No
one can be specifically entitled to a notional or zero amount
2.56
It is not possible to stream tax amounts to
beneficiaries where there is no referable net financial benefit remaining in
the trust — such as when the gross benefit has been reduced to zero by losses
or directly relevant expenses. [Schedule 2, item 11, subsection 115‑228(1) and item 24,
subsection 207‑58(1)]
Example 2.4
The Baguley Trust derives net rental income of
$100,000 and a franked distribution of $70,000 (with $30,000 attached franking
credits) from shares in TAS Pty Ltd. The trustee had interest expenses of
$100,000 on a loan taken out to purchase the shares in TAS Pty Ltd. As a result,
there are no net franked dividends.
The trust’s income is $70,000 and the taxable income
is $100,000.
The Baguley Trust has two beneficiaries, Justin and
Kerry. Under the terms of the trust, Justin is entitled to net franked
dividends and Kerry is entitled to all other income.
Justin has no entitlement to income as the trust has
no net dividend income. He is also not specifically entitled to anything as
there is no net franked dividend to which he can be specifically entitled.
By contrast, Kerry is entitled to all of the trust’s
income ($70,000).
As Kerry is entitled to all of the income of the trust
and as no-one was specifically entitled to any of the franked distribution,
Kerry’s share of the franked distribution equals all of the distribution
(section 207‑55). It follows that she receives all of the franking
credits (section 207-57).
2.57
However, if the trustee deals with all of the
franked distributions received by the trust as a single ‘class’ (or as part of
a broader class), the provisions apply to the total franked distributions as if
they were a single franked distribution. Therefore, if a beneficiary is
entitled to receive all (or a share) of the entire class of net franked
distributions of a trust and the class is in an overall gain position, the
beneficiary can be specifically entitled to all (or that share) of the entire
class of franked distributions, even if a particular franked distribution was
more than offset by directly relevant expenses. What matters is that the
trustee distributes the franked
distributions as a single class. It is not sufficient (or necessary) that the
trustee records the receipt of
the franked distributions as a single class. [Schedule 2, item 24, section 207‑59]
Example 2.5
Continuing Example 2.4, but suppose the Baguley Trust
also derives a $70,000 franked distribution (with $30,000 attached franking
credits) from RFP Pty Ltd, with no directly relevant expenses. Therefore, the
trust has net franked dividends of $40,000.
The trust’s income is $140,000 and the taxable income
is $200,000 (including $60,000 franking credits).
Justin is entitled under the deed to $40,000 (the net
franked dividends). As a result, he is specifically entitled to all of the
franked dividends of the trust (section 207‑58). It follows that he
receives all of the franking credits of $60,000 (sections 207-55 and 207‑57).
He includes $100,000 in his assessable income under Subdivision 207‑B.
Kerry receives $100,000 from the trust and $100,000 is
included in her assessable income under section 97 of the ITAA 1936
(as modified by Division 6E).
No
one can be specifically entitled to a ‘deemed gain’
2.58
Generally, no beneficiary can be specifically
entitled to a purely notional gain — that is, a deemed gain for tax purposes
such as deemed capital gains from a trust ceasing to be a resident trust. This
is because there is no net economic benefit referable to the notional gain that
beneficiaries can receive.
2.59
However, whether a beneficiary can be specifically
entitled to a capital gain or franked distribution is a question of fact. For
example, when a beneficiary becomes absolutely entitled to a trust asset, it
may be reasonable to expect the beneficiary will receive the net financial
benefit referable to the deemed (trust) capital gain from CGT event E5.
A
beneficiary cannot be specifically entitled to franking credits
2.60
It is not possible to make a beneficiary
specifically entitled to franking credits, or to separately stream franked
distributions and franking credits.
2.61
There is no change to the current rules that allow
franking credits to flow proportionally to beneficiaries that have a share of a
trust’s (positive) net income for an income year notwithstanding that the
franked distributions of the trust were entirely offset by expenses.
Recorded
in its character as a capital gain/franked distribution
2.62
The amount (or fraction) of the net economic
benefit that the beneficiary has received or can reasonably be expected to
receive must also be recorded in its
character as referable to the capital gain or franked distribution
in the accounts or records of the trust. [Schedule 2, item 11, paragraph 115‑228(1)(c) and item 24,
paragraph 207‑58(1)(c)]
2.63
The accounts or records of the trust would include
the trust deed itself, statements of resolution or distribution statements,
including schedules or notes attached to, or intended to be read with them.
However, a record merely for tax purposes is not sufficient.
2.64
The following resolutions or trust entitlements
would satisfy the requirement of being ‘recorded in its character as
referable’:
• Under
the trust deed, a beneficiary is entitled to all of the capital gains of the
trust.
• The
trustee resolves to distribute all of the dividends of the trust to a
beneficiary.
• Under
a trust deed that includes capital gains as income (either by default or
because the trustee exercises a power to re-characterise the amount as income),
a beneficiary is entitled to all of the profits made on or derived from an
asset.
• Under
a trust deed that does not include capital gains as income, the trustee
resolves to advance capital representing profits from the sale of a property
equally to the beneficiaries.
Entitlement
to unspecified amounts such as ‘the balance’ is not sufficient
2.65
Where a beneficiary is entitled to unspecified amounts
(or shares) — such as ‘the balance’ of trust income, ‘all of the trust income’,
‘half of the trust income’ or ‘$100 of trust income’ — this is not sufficient
to create a specific entitlement. This is because the entitlements have not
been recorded in their character
as referable to a capital gain or franked distribution.
• This
is true even if the beneficiary’s entitlement contains amounts referable to
capital gains or franked distributions.
• Further,
it is true even if the beneficiary’s entire entitlement is referable to capital
gains and/or franked distributions.
When
the record must be made by
2.66
For capital gains, a beneficiary’s entitlement must
be recorded no later than two months after the end of the income year. [Schedule 2,
item 11, paragraph 115‑228(1)(c)]
2.67
For franked distributions, a
beneficiary’s entitlement must be recorded by the end of the income year. [Schedule 2, item 24,
paragraph 207‑58(1)(c)]
Creating
specific entitlement through a chain of trusts
2.68
Specific entitlement to a capital gain or a franked
distribution can be created through a chain of trusts by meeting the
requirements for specific entitlement at each ‘step’.
2.69
For example, if a beneficiary is specifically
entitled to a capital gain from a trust in its capacity as trustee of a second
trust, the ‘trustee beneficiary’ will have an extra capital gain for the
purposes of calculating its net income. The trustee of the second trust may
then be able to make a beneficiary specifically entitled to that extra capital
gain.
Example 2.6
First Trust makes a (trust) gain of $90,000 on the
sale of an asset. The (non-discount) capital gain for tax purposes is
$100,000.
The trustee of First Trust resolves to distribute the
$90,000 gain to Zandra in her capacity as trustee of Second Trust. Zandra is
specifically entitled to the entire capital gain of $100,000. When calculating
the net income of Second Trust, Zandra therefore has an extra capital gain of
$100,000 under subsection 115-215(3).
Zandra resolves to distribute to Ralph $40,000
referable to the extra capital gain after applying a loss of $50,000 against
Second Trust’s $90,000 financial benefit in a way consistent with the
application of a capital loss against the $100,000 (tax) capital gain.
Ralph is specifically entitled to the $100,000 (extra)
capital gain. He has an attributable gain under subsection 115-225(1) of
$50,000 (taking into account the capital loss).
2.70
Where a capital gain or franked distribution flows
proportionally from one trust to another, it may still be possible for the second
trust to create a specific entitlement to its share of the capital gain, provided that the second trust received a
referable financial benefit from the first trust that can then be specifically
allocated to a beneficiary of the second trust.
Calculating
the ‘adjusted Division 6 percentage’
2.71
Where a trustee does not stream part or all of a
capital gain or franked distribution, the amounts not streamed flow
proportionally to beneficiaries (or the trustee). This proportion is based on a
taxpayers’ ‘adjusted Division 6 percentage’ and not their (original) share of the income of the trust estate
under Division 6. However, where no capital gains or franked
distributions have been streamed to specific beneficiaries, the two percentage
shares will be the same.
2.72
Broadly, a beneficiary’s ‘adjusted Division 6
percentage’ is their share of the income of a trust excluding capital gains and
franked distributions to which any
beneficiary (or the trustee) is specifically entitled. The amounts are
excluded only to the extent they were part of the income of the trust in the
first place.
2.73
That is, the ‘adjusted Division 6 percentage’
is calculated as:
• the
beneficiary’s present entitlement to trust income excluding any capital gains
or franked dividends to which they
are specifically entitled; divided by
• the
income of the trust excluding any capital gains or franked distributions to
which any entity is specifically
entitled.
[Schedule 2, items 2,
4 and 5, subsection 95(1) of the ITAA 1936 and item 25,
subsection 995‑1(1)]
2.74
If the sum of beneficiaries’ adjusted
Division 6 percentage is less than 100 per cent, the difference
is the trustee’s adjusted Division 6 percentage. If there is no income of
the trust remaining after disregarding amounts to which any entity is
specifically entitled, the trustee has an adjusted Division 6 percentage
of 100 per cent. [Schedule 2, items 2 and 4, subsection 95(1)
of the ITAA 1936 and item 25, subsection 995-1(1)]
Example 2.7
In the 2010-11 income year, the Lang Trust received
$100,000 of rental income and $70,000 of fully franked distributions. The
trust has no expenses. Its income is therefore $170,000 and its taxable income
is $200,000 (including the $30,000 franking credit attached to the
distribution).
The trust has two beneficiaries Hannah and Lucy. The
trustee of the Lang Trust in accordance with a power under the deed makes
Hannah presently and specifically entitled to $50,000 of the franked
distributions and additionally entitled to so much of the remainder of the
trust’s income as to make her total present entitlement equal to 50 per
cent of the income of the trust.
Lucy is presently entitled to 50 per cent of the
income of the trust.
Hannah’s Division 6 percentage is 50 per cent as
she is entitled to half of the income of the trust estate. Lucy’s
Division 6 percentage is likewise 50 per cent.
However, Hannah’s adjusted Division 6 percentage is 29
per cent ($85,000 − $50,000)/($170,000 − $50,000), being
Hannah’s entitlement to income disregarding her specific entitlement to $50,000
of the distribution divided by the adjusted income of the trust of $120,000
disregarding the $50,000 of the income to which Hannah is specifically entitled.
Lucy’s adjusted Division 6 percentage is 71 per cent ($85,000/$120,000).
2.75
The calculation of adjusted Division 6 percentage
only excludes capital gains or franked distributions to which an entity is
specifically entitled (to the extent they were part of the income of the trust)
— it does not exclude all capital
gains and franked distributions. Division 6E is not relevant for the
calculation of the adjusted Division 6 percentage.
Treatment of
capital gains under amended Subdivision 115‑C
2.76
The existing Subdivision 115‑C sets out rules
for dealing with the taxable income that relates to capital gains of a trust.
2.77
Broadly, the purpose of the amendments to
Subdivision 115‑C is to ensure that capital gains are assessed to those
beneficiaries that are specifically entitled to them.
2.78
That is, the taxable capital gains of a trust are
taken into account in working out the net capital gain or loss of beneficiaries
that are specifically entitled to the related trust amounts — regardless of
whether the related amounts are part of the income or capital of the trust
estate.
2.79
Capital gains are allocated on a ‘proportionate’
basis to the extent that no one is specifically entitled to part or all of a
capital gain.
• That
is, where there is an amount of a capital gain to which no one is specifically
entitled, beneficiaries are allocated a proportionate share of that part of the
gain based on their (adjusted) share of the income of the trust estate.
• Trustees
are similarly allocated a proportionate share of an amount of a capital gain to
which no one is specifically entitled — but only to the extent that there is an
(adjusted) share of the income of the trust estate to which no beneficiary is
presently entitled.
Changes
to the general application of Subdivision 115‑C
2.80
Beneficiaries no longer need to have an amount of
assessable income included under section 97, 98A or 100 of
the ITAA 1936 to be treated as having an extra capital gain under
section 115‑215. This ensures that a ‘capital beneficiary’ that is
specifically entitled to an amount representing a capital gain of a trust is
treated as having an extra capital gain in relation to that amount even if they
are not presently entitled to a share of the income of the trust estate. [Schedule 2, item 9,
subsection 115‑215(3)]
2.81
Beneficiaries also no longer receive a deduction
for extra capital gains they have as a result of Subdivision 115‑C.
Instead, the amount included in a beneficiary’s assessable income calculated
under Division 6 is modified by Division 6E, if necessary, to exclude any
amount of the taxable income of the trust related to the capital gain. [Schedule
2, item 8, section 115-200 and item 10]
2.82
Subdivision 115‑C may also increase the amount
on which a trustee is assessed, either under section 98 of the ITAA 1936
(on behalf of a beneficiary) or under section 99 or 99A of the ITAA 1936.
This does not lead to double taxation, because the amounts included directly
under Division 6 of the ITAA 1936 are adjusted appropriately. [Schedule 2, item 11, sections 115‑220 and 115‑222]
Calculating
the amount of extra capital gain for a beneficiary
2.83
There are four steps to calculate a beneficiary’s
extra capital gain.
• First,
determine the beneficiary’s ‘share of the capital gain’ of the trust — this is
defined as an ‘amount’ of the gain.
• Second,
divide that amount by the (total) capital gain — this gives the beneficiary’s
‘fraction’ of the capital gain.
• Third,
multiply that fraction by the taxable income of the trust that relates to the
capital gain. The result is the ‘attributable gain’.
• Fourth,
gross up the result of step three as appropriate for any CGT concessions (the
general CGT discount or the small business 50 per cent reduction)
applied by the trustee to that capital gain.
[Schedule 2, item 9, subsection 115‑215(3) and item 11,
sections 115‑225 and 115‑227]
2.84
This calculation applies on a ‘gain by gain’ basis
for each capital gain of the trust.
Step
1 — determine the beneficiary’s share of the capital gain of the trust
2.85
A beneficiary’s share of a trust capital gain is:
• the
amount of the capital gain to which the beneficiary is specifically entitled;
plus
• the
beneficiary’s adjusted Division 6 percentage of the amount of the capital gain
to which no beneficiary is specifically entitled (see paragraphs 2.71 to 2.75).
[Schedule 2, item 11, section 115‑227
and item 26, subsection 995-1(1)]
2.86
As described in paragraphs 2.35 to 2.70, a
beneficiary that receives all of the net financial benefit referable to a
capital gain (after the application of relevant losses) may be specifically
entitled to the entire (tax) capital gain. For the purposes of determining specific
entitlement only, the losses (a trust concept) must be applied in a way that is
consistent with how the trustee applies capital losses for tax purposes.
2.87
Where a beneficiary has received (or can reasonably
be expected to receive) an amount referable to a capital gain, that beneficiary
will generally be assessable in respect of that capital gain. It does not
matter whether all or part of that amount is part of the income of the trust
estate.
2.88
Similarly, because the beneficiary’s entitlement
must be to a trust amount (the net financial benefit) and not a tax concept, it
is not effective for tax purposes to stream the ‘taxable component’ to one
beneficiary and the tax-free ‘discount component’ to another beneficiary. A
beneficiary who is only entitled to the ‘taxable component’ will generally only
be specifically entitled to half of the capital gain.
Example 2.8
The Little Trust generated $100 of rent and a $600
capital gain (which was a discount capital gain). The trust also had a capital
loss of $100.
The trust deed does not define ‘income’ and therefore
capital gains do not form part of the trust income. As a result, the income of
the trust estate is $100 and the taxable income is
$350 ($100 + ($600 − $100)/2)
The trustee resolves to distribute $300 related to the
capital gain (after absorbing the capital loss) to Catherine and the $100 of
rent to Aaron.
Catherine is specifically entitled to
60 per cent of the $600 capital gain under subsection 115‑228(1)
because she can reasonably be expected to receive the economic benefit of
60 per cent ($300) of the $500 capital gain remaining after
accounting for the $100 capital loss. Under section 115-227, Catherine’s
share of the capital gain is $360 (60 per cent of the $600 capital gain).
Aaron’s share of the capital gain is $240 under
section 115‑227 because he has an adjusted Division 6 percentage of
100 per cent (since none of the capital gain is treated as trust
income) and there is $240 of the $600 capital gain to which no one is
specifically entitled.
Step
2 — divide by the total capital gain
2.89
To determine the beneficiary’s fraction of the
capital gain, simply divide the beneficiary’s ‘share of the capital gain’ by
the (total) capital gain. [Schedule 2, item 11, paragraph 115‑225(1)(b)]
Example 2.9
Continuing from Example 2.8, Catherine divides her
share of the capital gain ($360) by the total capital gain ($600) and therefore
has 6/10 of the capital gain under paragraph 115‑225(1)(b).
Aaron divides his share of the capital gain ($240) by
the total capital gain ($600) and therefore has 4/10 of the capital gain under
paragraph 115‑225(1)(b).
Step
3 — multiply the beneficiary’s fraction of the capital gain by the trust’s
taxable income relating to the capital gain
2.90
A beneficiary’s ‘attributable gain’ is their
fraction of the capital gain multiplied by the taxable income that relates to
the capital gain. [Schedule 2, item 11, subsection 115‑225(1)]
2.91
Generally, the taxable income of the trust that
relates to the capital gain will be the taxable amount of the capital gain
remaining after applying any capital losses or net capital loss to the capital
gain and after applying any CGT discounts [Schedule 2, item 11, paragraph 115‑225(1)(a)].
• This
would equal the trust’s net capital gain assuming the trust only had the one
capital gain.
• Consistent
with the CGT regime, the trustee can choose the order in which they apply the
losses. This may reduce the taxable amount for a particular capital gain to
zero.
Example 2.10
Continuing from Example 2.9, the taxable income
relating to the capital gain calculated under paragraph 115‑225(1)(a) is $250.
Catherine’s attributable gain calculated under
subsection 115‑225(1) is $150 ($250 − 6/10).
Aaron’s attributable gain calculated under subsection
115‑225(1) is $100 ($250 × 4/10).
2.92
However, in some circumstances, taxpayers rateably
reduce the taxable amount of the capital gain to ensure that beneficiaries and
the trustee are not assessed on more than the total taxable income of the
trust.
2.93
The rateable reduction applies where
the trust’s net capital gain and (total) franked distributions (net of directly
relevant deductions) are together greater than the taxable income of the trust
(excluding franking credits). [Schedule 2, item 11, subsection 115‑225(2)]
• For
example, the rateable reduction would apply where a trust’s only income is from
capital gains and franked distributions and the trust has general management
expenses.
• The
rateable reduction would also apply where a trust has net capital gains and/or
franked distributions and the other sources of income are in an overall tax
loss position.
2.94
To make the rateable reduction, multiply the
taxable amount of the capital gain by the following formula:
Taxable income of the trust (excluding franking
credits)
net capital gain of the trust + ‘net franked distributions’
where net franked distributions means franked distributions of
the trust reduced by directly relevant deductions. [Schedule 2, item 11,
subsection 115‑225(3)]
2.95
The same rateable reduction applies
to each capital gain (and to each franked distribution).
Example 2.11
Assume the same facts as Example 2.8, but suppose the
trust also had general expenses of $200. The taxable income of the trust is
therefore $150 and not $350.
The taxable income related to the capital gain is
reduced to $150 because the net income of $150 is less than the trust’s net
capital gain of $250 (that is, apply subsection 115‑225(3) and multiply
the taxable amount of the capital gain ($250) × $150/$250).
Catherine’s attributable gain calculated under
subsection 115‑225(1) is therefore $90 ($150 × 6/10).
Aaron’s attributable gain calculated under
subsection 115‑225(1) is therefore $60 ($150 × 4/10).
Step
4 — gross up the amount for CGT discounts applied by the trustee
2.96
After multiplying the beneficiary’s fraction of the
capital gain by the taxable income of the trust that relates to the capital
gain, the resulting amount is grossed up for any discounts the trustee applied
to that gain [Schedule 2, item 9, subsection 115‑215(3)].
• If
no discounts applied, there is no gross up.
• If
either the general CGT discount or the small business 50 per cent
reduction applied (but not both), the amount is doubled.
• If
both discounts applied, the amount is quadrupled.
2.97
The beneficiary has an extra capital gain equal to
the grossed up amount. This lets the beneficiary reduce their extra
capital gains by any current or prior year capital losses that they have, and
then apply any relevant discounts to work out their own net capital gain. [Schedule 2,
item 9, subsection 115‑215(3)]
Example 2.12
Following on from Example 2.11, subsection 115‑215(3)
requires Catherine to double her attributable gain of $90 to an extra capital
gain of $180 because the trustee had applied the 50 per cent CGT
discount. Aaron similarly doubles his attributable gain to $120.
Catherine and Aaron can then apply any capital losses
or net capital losses to reduce the capital gain. As they are individuals,
they can then apply the 50 per cent CGT discount to any amounts
remaining.
Assessing
the trustee in respect of a beneficiary under section 98
2.98
Where a trustee is assessed and
liable to pay tax under section 98 of the ITAA 1936 in respect of a
beneficiary, the trustee increases the assessable amount to reflect the
beneficiary’s attributable gain in respect of each capital gain of the trust [Schedule 2, item 11,
section 115‑220].
• This
applies even if the only reason that the section 98 assessment arises is
because the beneficiary has a share of a capital gain [Schedule 2, item 11, subsection 115‑220(1)].
• That
is, section 115-220 will apply where a non-resident beneficiary or a
beneficiary under a legal disability is specifically entitled to all or part of
a capital gain, regardless of whether they have any entitlement to income of
the trust.
2.99
The attributable gain is calculated in the same way
as described in steps 1 to 3 above, based on the beneficiary’s share of each
capital gain. The trustee will generally be liable to be assessed on that
amount under section 98 of the ITAA 1936, even if the amount it would
otherwise have been assessed on under that section was reduced to nil because
of Division 6E.
2.100
The attributable gain is doubled if the capital
gain is a discount capital gain and the beneficiary is a company or a
beneficiary in the capacity as a non-resident trustee of another trust estate
(unless subsection 97(3) of the ITAA 1936 applies to that
beneficiary). This effectively removes the effect of the discount from
beneficiaries who would not be able to claim the discount had they made the
capital gain directly. [Schedule 2, item 11, paragraph 115‑220(1)(b)]
Assessing
the trustee under section 99 or 99A of the ITAA 1936
2.101
A trustee increases the amount it is
assessed and liable to pay tax on under section 99 or 99A of the
ITAA 1936 to reflect the trustee’s share of each capital gain of the
trust. This applies even if the only reason for the section 99 or 99A
assessment is because the trustee has a share of a capital gain. [Schedule 2,
item 11, section 115‑222]
2.102
For section 99 assessments, the amount is
calculated in the same way as described in steps 1 to 3 above, without the need
to gross up the amount for any CGT discounts. [Schedule 2, item 11, subsections 115‑222(1)
and (2)]
2.103
For section 99A assessments, the amount is
calculated in the same way as for a beneficiary (including step 4), using the
trustee’s share of each capital gain. [Schedule 2, item 11, subsections 115‑222(3)
and (4)]
2.104
This treatment removes the benefit of any CGT
discounts for a trustee assessed under section 99A of the ITAA 1936,
replicating the effect of the repealed section 115‑225.
2.105
A trustee can generally only be specifically
entitled to an amount of a capital gain if they choose to be assessed on the
capital gain under section 115‑230.
2.106
Therefore, apart from when they make such a choice,
a trustee will generally only have a share of a capital gain if:
•
there is no beneficiary specifically entitled to
part (or all) of the capital gain; and
•
there is a share of the income of the trust estate
to which no beneficiary is presently entitled (after disregarding capital gains
and net franked distributions to which a beneficiary is specifically entitled)
— or there is no trust income.
Option
for resident trustee to be assessed on a capital gain
2.107
If permitted by the trust deed, the trustee of a
resident trust may choose to be assessed on a capital gain of the trust,
provided no beneficiary has received any amount referable to the gain during
the income year or within two months of the end of the income year. The choice
must be made in respect of the whole capital gain. [Schedule
2, items 12, 13, 15, 16 and 17, section 115‑230]
2.108
The trust must be a resident trust estate (within
the meaning of Division 6) in the income year in respect of which the
choice is made. [Schedule 2, item 14, subsection 115‑230(2)]
2.109
This is similar to the choice that was available
under the repealed section 115‑230, but is not limited to testamentary
trusts. In particular, it allows the trustee of a trust to pay tax on behalf
of:
• an
income beneficiary who cannot benefit from the gain; or
• a
capital beneficiary who is unable to immediately benefit from the gain.
2.110
If the trustee makes the choice, no beneficiary is
treated as having an extra capital gain under Subdivision 115‑C. The trustee
is also not assessed on behalf of any beneficiary under section 98 of the
ITAA 1936. [Schedule 2, item 17, paragraph 115‑230(4)(a)]
2.111
Instead, the trustee is assessed on
the taxable income relating to the capital gain under section 99 or 99A of
the ITAA 1936 as appropriate (by way of section 115‑222). This is done by
deeming the trustee to be specifically entitled to the capital gain. [Schedule 2, item 17,
paragraph 115‑230(4)(b)]
Example 2.13
The Ngo Trust is a
resident trust within the meaning of Division 6. It is a unit trust with
different income and capital unit-holders.
Under the deed, the
capital unit-holders have a vested and indefeasible interest in the capital
gains made by the trust, but cannot demand payment of those gains until certain
events happen.
The trustee makes a $200 capital gain. After
application of the CGT discount, a net capital gain of $100 is included in the
trust’s taxable income.
The capital unit‑holders are specifically entitled to
the capital gain (the financial benefits referable to that gain being reflected
in the value of their units, with the trust deed setting out their entitlement to
the capital gains of the trust, in their character as capital gains), but
currently have no right to demand payment of it. Without more, they would be
treated as having extra capital gains in respect of this gain under
subsection 115‑215(3), but would have no corresponding cash flow from
which to pay the associated tax liability.
Accordingly, the trustee elects to be assessed on the
capital gain under section 115‑230.
As a result of this election, the capital unit-holders
are not taken to have any extra capital gain. Instead, the trustee is taken to
be specifically entitled to the full amount of the gain. The trustee therefore
increases its assessable amount under section 99 or 99A of the
ITAA 1936 by $200 (being the amount produced after applying section 115‑222).
Interaction
with Division 855 — capital gains and foreign residents
2.112
As is currently the case, a foreign resident
beneficiary of a fixed trust may be able to disregard an extra capital gain
they make under subsection 115‑215(3) if it relates to a CGT event
happening to a CGT asset of a trust that is not taxable Australian property.
2.113
Because of the operation of subsection 855‑40(3),
the trustee of the fixed trust would also not be liable to pay tax on the
taxable income relating to the capital gain by way of section 115‑220.
Treatment of
franked distributions and franking credits under Subdivision 207‑B
2.114
Subdivision 207‑B contains rules that apply to
franked distributions that flow through trusts and partnerships.
2.115
Broadly, tax recognition of franking credits
(attached to franked distributions) is achieved through a gross up offset
mechanism whereby the beneficiary of a trust that derives a franked
distribution includes in their assessable income their share of the franked
distribution and their share of the franking credit on the distribution (the
gross up). The beneficiary is then, subject to eligibility, entitled to an
offset equal to their share of the franking credit on the distribution.
2.116
Integrity rules governing the availability of such
an offset are set out within Subdivision 207‑F. For example,
paragraph 207‑150(1)(a) requires that the beneficiary must be a ‘qualified
person’ in relation to the distribution in order to obtain the benefit of any
franking credit on that distribution.
Changes
to the general application of Subdivision 207‑B
2.117
The amendments in this Schedule alter the operation
of Subdivision 207‑B as it applies to trusts and their beneficiaries. The
operation of Subdivision 207‑B as it applies to partnerships is unaffected.
2.118
In relation to trusts and their beneficiaries,
these amendments modify the current law to:
• ensure
that both an entity’s share of the franking credit on a distribution and its
share of the franked distribution are dealt with under Subdivision 207‑B;
• clarify
how an entity’s share of a franked distribution within the meaning of
section 207‑55 is to be calculated;
• provide
that where a beneficiary of a trust has a specific entitlement to a share of a
franked distribution derived by the trustee, the portion of the distribution
taxed to that beneficiary includes so much of the distribution to which the
beneficiary is specifically entitled that is reflected in the taxable income of
the trust;
• provide
that where there is a share of a franked distribution derived by the trustee of
a trust to which no beneficiary has a specific entitlement, that portion is
assessed to those beneficiaries presently entitled to income of the trust in
proportion to their income entitlements (calculated disregarding any capital
gains and franked distributions in respect of which an entity is specifically
entitled); and
• ensure
that any franked distributions and/or attached franking credits that are
subject to the application of Subdivision 207‑B are not taxed twice.
Share
of franking credit
2.119
The amendments in this Schedule introduce a new
approach to the calculation of an entity’s share of the franked distribution
which makes use of the concept of a taxpayer being specifically entitled to a
portion of a distribution received by a trust. The introduction of the concept
of ‘specific entitlement’ into Subdivision 207‑B has necessitated some
refinements to item 3 in the table in subsection 207‑55(3). These
refinements are discussed in detail in paragraphs 2.123 to 2.128. The concept
of ‘specific entitlement’ for the purpose of a franked distribution is
discussed in paragraphs 2.132 to 2.136.
2.120
As the share of a franked distribution, calculated
under section 207‑55, is used in determining an entity’s share of the
franking credit on a franked distribution under section 207‑57, in some
circumstances these amendments alter the share of a franking credit that an
entity would have otherwise been allocated.
Calculating
the attributable franked distribution of a beneficiary or trustee
2.121
There are three steps involved in calculating the
amount of an attributable franked distribution under section 207‑37.
• First,
determine the beneficiary’s or trustees’ ‘share of the franked distribution’ of
the trust — this is defined as an ‘amount’ of the distribution.
• Second,
divide that amount by the (total) franked distribution — this gives the
beneficiary’s or trustee’s ‘fraction’ of the franked distribution.
• Third,
multiply that fraction by the amount of the franked distribution (that is, the
franked distribution to the extent that an amount remains after reducing the
distribution by directly relevant deductions). The result of this
multiplication is the attributable franked distribution.
[Schedule 2, item 19, subsection 207‑37(1)]
Step
1 —
determine the beneficiary’s share of the franked distribution
2.122
A beneficiary’s or trustee’s share of the franked
distribution is a share of the gross amount of the distribution.
2.123
It is calculated in accordance with
section 207‑55. Previously, where the entity to which the distribution
flows is a beneficiary of a trust, item 3 in the table in
subsection 207‑55(3) had the effect that the beneficiary, in order to
calculate its share of the franked distribution, had to determine how much of
the franked distribution was ‘taken into account’ in working out the amounts
that they would have been assessed on under Division 6.
2.124
The introduction of the concept of ‘specifically
entitled’ into Subdivision 207‑B, to clarify the circumstances in which a
trustee can stream franked distributions to specific beneficiaries for tax
purposes, has resulted in amendments to item 3 in the table in
subsection 207‑55(3). [Schedule 2, item 22, subsection 207-55(3)]
2.125
Where a trust receives a franked distribution and
the distribution flows through the trust to a beneficiary, the amendments to
item 3 mean that the beneficiary’s share of the franked distribution is
now calculated under subsection 207-55(4) as the sum of:
•
the amount of the franked distribution to which the
beneficiary is specifically entitled (see paragraph 2.133); and
• the
beneficiary’s proportionate entitlement to any part of the franked distribution
to which no beneficiary is specifically entitled.
[Schedule 2, item 23, subsection 207‑55(4)]
2.126
Where a trustee is liable to be assessed and pay
tax in respect of a beneficiary under section 98 of the ITAA 1936 (or
would be so liable but for another provision in the Act such as
Division 6E), subparagraph 207-55(4)(a)(ii) operates to treat the
trustee as being specifically entitled to the amount of the franked
distribution to which the relevant beneficiary is specifically entitled. [Schedule
2, item 23, paragraph 207‑55(4)(a)]
2.127
A beneficiary’s proportionate share of that part of
a franked distribution to which no beneficiary is specifically entitled, is
calculated in accordance with paragraph 207‑55(4)(b). This amount is the
amount of the franked distribution multiplied by the beneficiary’s adjusted
Division 6 percentage. Again allowance is made for circumstances where a
trustee is assessed in respect of a beneficiary under section 98 of the
ITAA 1936. [Schedule 2, item 23, subparagraphs 207‑55(4)(b)(i)
and (ii)]
2.128
The concept of a beneficiary’s ‘adjusted
Division 6 percentage’ is defined in subsection 995‑1(1) to have the
same meaning as in subsection 95(1) of the ITAA 1936. This
percentage is the Division 6 percentage of a beneficiary or trustee
calculated on the assumption that the amount of any capital gains or franked
distributions to which any beneficiary or trustee is specifically entitled are
disregarded in working out the income of the trust estate. [Schedule 2, item 2, subsection 95(1)
of the ITAA 1936]
2.129
A trustee assessed and liable to pay tax under
section 99 or 99A only has a share of a franked distribution for the
purpose of section 207‑55 where:
• there
is no beneficiary specifically entitled to part (or all) of the franked
distribution; and
• there
is a share of the income of the trust estate to which no beneficiary is
presently entitled.
Example 2.14
A franked distribution of $70 is made to the trustee
of the Harvey Trust in the 2010‑11 income year. The trust also has $100 of
interest income for the income year and has incurred a $50 interest expense on
the borrowings used to purchase the share which gave rise to the $70 distribution.
The income of the trust estate is therefore $120. The taxable income of the
trust is $150 (including the $30 franking credit attached to the distribution).
The trust has two beneficiaries, Sharon and Audrey. Sharon
is presently entitled to 40 per cent of the income of the trust estate. Audrey
is presently entitled to the remaining 60 per cent of the income of the
trust estate. Neither beneficiary is specifically entitled to any portion of
the distribution.
Sharon’s share of the franked distribution is $28
calculated as (0.4 × $70).
Audrey’s share of the franked distribution is $42
calculated as (0.6 × $70).
Step 2
—
divide that amount by the (total) franked distribution
2.130
To determine the beneficiary’s or trustee’s
fraction of the franked distribution simply divide the beneficiary’s or
trustee’s share of the franked distribution by the total franked distribution.
Example 2.15
Continuing on from Example 2.14 Sharon’s fraction of
the franked distribution is calculated by dividing her share of the franked
distribution ($28) by the total franked distribution ($70).
Her fraction of the franked distribution is therefore
$28/$70 or 2/5ths.
The same calculation applies for Audrey. Her fraction
of the franked distribution is calculated by dividing her share of the franked
distribution ($42) by the total franked distribution ($70).
Her fraction of the franked distribution is therefore
$42/$70 or 3/5ths
Step 3
—
multiply that fraction by the taxable income of the trust that relates to the
net franked distribution
2.131
A beneficiary’s or trustee’s attributable franked
distribution is their fraction of the franked distribution multiplied by the
amount of the franked distribution to the extent that an amount of the franked
distribution remains after reducing it by the deductions that are directly
related to it.
Example 2.16
Continuing from Example 2.15 the amount of the franked
distribution remaining after reducing it by the $50 interest deduction is $20 ($70 − $50).
Sharon’s attributable franked distribution is
therefore $8, calculated by multiplying 2/5ths by $20.
Audrey’s attributable franked distribution is $12,
calculated by multiplying 3/5ths by $20.
2.132
Subsections 207‑37(2) and (3)
provide for a rateable reduction of the amount otherwise identified as the
attributable franked distribution where the net income of the relevant trust
(excluding franking credits) is less than the sum of the net capital gain of
the trust and the total of all of the franked distributions (net of directly
relevant deductions). This adjustment is necessary to ensure that
beneficiaries and the trustee together are not assessed on more than the total
taxable income of the trust. The adjustment will apply, for example, where a
trust’s only income is from capital gains and franked distributions and the
trust has general management expenses. [Schedule 2, item 19,
subsections 207‑37(2) and (3)]
Specifically
entitled to an amount of a franked distribution
2.133
The concept of ‘specific entitlement’ is not the
same as the concept of ‘present entitlement’. This is discussed in detail in
paragraphs 2.35 to 2.70.
2.134
The amount that a beneficiary is taken to be
specifically entitled to in relation to a franked distribution is worked out in
accordance with subsection 207‑58(1). This subsection requires the
beneficiary to multiply the amount of the franked distribution by the
beneficiary’s ‘share of the net financial benefit’ associated with the franked
distribution divided by the total ‘net financial benefit’ associated with the
distribution. [Schedule 2, item 24, subsection 207‑58(1)]
2.135
Subsection 207‑58(2) clarifies that the net
financial benefit associated with a franked distribution is the financial
benefit net of expenses that are directly relevant to the franked distribution.
An example of such an expense is an interest outgoing incurred on borrowings
taken out for the purpose of acquiring the share which gave rise to the franked
distribution. [Schedule 2, item 24, subsection 207-58(2)]
2.136
A beneficiary of a trust that
receives a franked distribution cannot generally be made specifically entitled
to any share of that distribution if the whole of the distribution is sheltered
at the trust level by directly relevant expenses. Moreover, despite being able
to be reduced by directly relevant expenses, a beneficiary’s share of the net
financial benefit referrable to a franked distribution can never be less than
nil.
Example 2.17
The Charlie Trust derives a distribution of $100 and
incurs directly related expenses of $150. Under the deed of the trust, Mark is
entitled to all of the dividend income of the trust.
Mark is not specifically entitled to any portion of
the distribution as the distribution is entirely sheltered by directly related
expenses at the trust level.
If instead the directly related expenses totalled only
$90, the effect of the deed is to make Mark presently entitled to the $10 of
trust income relating to the distribution. However for the purposes of
section 207‑58, Mark is specifically entitled to the whole of the
distribution as his share of the net financial benefit associated with the
distribution equals that total net financial benefit.
Trustee
distributes all of the franked distributions within a single class
2.137
Where a trustee distributes all of the franked
distributions received in an income year within a single class of income,
Subdivision 207‑B operates as if all of the franked distributions were
‘pooled’ into one single franked distribution. This allows trustees to
‘stream’ part or all of a class of income that includes franked distributions
even where some of the individual franked distributions are entirely sheltered
by directly relevant expenses.
2.138
The trustee does not need to distribute all of the
class of income. However, for the ‘pooling’ to apply, every entitlement to
part or all of a franked distribution must be an entitlement to part or all of
the entire class of income. That is, if any part of even one franked
distribution is ‘streamed’ separately from the class of income, the pooling
does not apply to any franked distribution.
2.139
A class of
income means an appropriate subset of trust income (and not all
trust income generally) of which franked distributions are a generally accepted
inclusion, such as ‘franked dividends’, ‘dividends’ or ‘passive income’.
Expenses that are directly relevant to all of the class of income may be
charged against that class for trust purposes. However, for the purposes of
determining specific entitlement, only the expenses directly relevant to the
franked distributions will be taken into account (see paragraph 2.53). [Schedule
2, item 24, section 207-59]
Example 2.18
The McLachlan Trust receives and then distributes in
full four different franked distributions of $70 and one unfranked distribution
of $100 in the 2010‑11 income year. The trust incurs directly relevant
expenses of $100 in relation to one of the franked distributions. Under the
terms of the trust Geoff is entitled to 50 per cent of the dividend
income of the trust.
As the trust distributes the franked distributions
within a single class (albeit a class that includes unfranked distributions),
Geoff treats all of the franked distributions as one single franked
distribution.
Therefore, he is specifically entitled to half of the
(total) franked distributions of the trust ($140 out of $280) and will have an
attributable franked distribution under section 207‑37 of $90 ($280 − $100/2).
Geoff will also have a $60 share of the $120 of franking credits (including the
franking credits on the franked distribution entirely sheltered by directly
relevant expenses).
If instead Geoff was
entitled to two of the four franked distributions, he could not be specifically
entitled to the franked distribution entirely sheltered by the $100 of directly
relevant expenses (whether or not it was one of the two distributions to which
he was purportedly entitled). This is because the franked distributions of the
trust would not have been distributed within a single class.
Allocation
of additional amounts of assessable income
2.140
There are four conditions that must be satisfied
before a portion of a franking credit is included in the assessable income of
an entity for an income year:
• a
franked distribution is made to or flows indirectly to a partnership or the
trustee of a trust in an income year;
• the
assessable income of the partnership or trust for that year includes an amount
that is all or part of the franking credit;
• the
distribution flows indirectly to an entity that is a partner in a partnership
or a beneficiary of a trust or the trustee of that trust; and
• the
entity has an amount of assessable income for that year that is attributable to
all or part of the distribution.
2.141
Where these conditions are satisfied, an entity
includes in its assessable income so much of the franking credit as is equal to
its share of the franking credit on the franked distribution.
2.142
The existing subsection 207‑35(3) is replaced
by subsections 207‑35(3) to (6) introduced by this Schedule. The effect
of these amendments when read together with Division 6E is that:
• subsections 207‑35(3) and (4)
deal with the treatment of franking credits and franked distributions for the
beneficiary of a trust; and
• subsections 207‑35(5) and (6)
deal separately with the treatment of franking credits and franked
distributions for the trustee of a trust that, disregarding Division 6E,
would be assessed and liable to tax under section 98, 99 or 99A.
2.143
In order to ensure the effective
operation of section 207‑35, the requirements in paragraphs 207‑35(3)(d)
and (5)(c) apply disregarding the operation of Division 6E. This is
necessary to ensure that relevant entities have an amount of assessable income
for the purposes of section 207‑35. [Schedule 2, item 18, paragraphs 207‑35(3)(d) and 207‑35(5)(c)]
Beneficiaries
of a trust and partners in a partnership
2.144
Subsection 207‑35(3) now only
lists the four requirements that must be met before subsection 207‑35(4)
operates to include an amount in the assessable income of either a partner in a
partnership or the beneficiary of a trust. [Schedule 2, item 18, subsection 207‑35(3)]
2.145
Where an entity is a partner in a partnership and
the conditions outlined in subsection 207‑35(3) are satisfied,
paragraph 207‑35(4)(a) includes, in the partner’s assessable income, so
much of the franking credit as is equal to the partner’s share of the franking
credit on the franked distribution. This is consistent with the existing law.
[Schedule 2, item 18, paragraph 207‑35(4)(a)]
2.146
Where the entity is the beneficiary of a trust,
subparagraph 207‑35(4)(b)(i) includes in the beneficiary’s assessable
income so much of its share of the franking credit on the distribution. This
is also broadly consistent with the current law.
2.147
However, in contrast to the existing law,
subparagraph 207‑35(4)(b)(ii) also requires the beneficiary to include in
its assessable income, its attributable franked distribution as calculated in
accordance with section 207‑37 (see paragraph 2.121). [Schedule 2, item 18, paragraph 207‑35(4)(b)]
Example 2.19
A fully franked distribution of $70 is made to the
trustee of the Sloper Trust in the 2010‑11 income year. The trust also has
$100 of rental income for the income year. The income of the trust estate is
$170. The taxable income of the trust is $200 (including the $30 franking
credit attached to the distribution).
The trust has two beneficiaries, Phillip and Katie,
each presently entitled to 50 per cent of the income of the trust
estate. Neither beneficiary is specifically entitled to any particular class
of income. Therefore, each uses the same methodology in working out their
share of the franked distribution and franking credits.
Because no beneficiary has a specific entitlement to
the franked distribution, their share of that franked distribution will be
determined by reference to their adjusted Division 6 percentage. Phillip
and Katie are each entitled to 50 per cent of the income of the trust
estate (and no adjustments are required as there are no capital gains or
franked distributions to which someone is specifically entitled). Accordingly,
each has a share of the franked distribution of
$35 ($70 × 50 per cent), and an
attributable distribution of the same amount ($70 × $35/$70) (see paragraph 2.121).
As worked out under section 207‑57, their share
of the franking credit on the franked distribution is the franking credit,
multiplied by their percentage share of the franked distribution ($30 × $35/$70),
or $15.
Phillip and Katie therefore each include $35 of the
franked distribution and $15 of the franking credit in their assessable income
under Subdivision 207‑B (a total of $50).
As a result of Division 6E, the amount otherwise
assessed under Division 6 is reduced by the $100 brought to tax under
Subdivision 207‑B. Specifically, the amount assessed to Phillip and Katie
under Division 6 is calculated as if:
• the
$70 dividend and $30 associated franking credit was disregarded for the
purposes of calculating the trust’s taxable income;
• the
$70 franked distribution were disregarded for the purposes of calculating the
income of the trust estate; and
• Phillip’s
and Katie’s present entitlement excluded their $35 share of the franked
distribution.
As such, section 97 of the ITAA 1936
includes $50 (($85 − $35) / ($170 − $70) ×
($200 − $100)) in both of Phillip’s and Katie’s assessable income
instead of $100 as would otherwise have been the case.
The total amount included in each of their assessable
income is $100 ($50 under Subdivision 207‑B and $50 under section 97
of the ITAA 1936).
Trustees
2.148
These amendments deal separately with the case
where, disregarding Division 6E, a trustee is assessed and liable to pay
tax under section 98, 99 or 99A of the ITAA 1936. Subsection 207‑35(5)
now lists the requirements that must be met before subsection 207‑35(6)
operates to make a trustee liable to be assessed (and pay tax). [Schedule 2, item 18,
subsections 207‑35(5) and (6)]
2.149
If the conditions in
subsection 207‑35(5) are satisfied a trustee is required to increase the
amount on which it is assessed under Division 6 so as to bring to tax in
the trustee’s hands an appropriate share of the distribution (also calculated
in accordance with section 207‑37 and referred to as the attributable
franked distribution) and an appropriate share of the franking credit. [Schedule
2, item 18, subsection 207‑35(6)]
Example 2.20
A fully franked distribution of $70 is paid to the
trustee of the Marsden Trust in the 2010‑11 income year. The trust also has
$300 of interest income for the income year. The income of the trust estate is
$370. The taxable income of the trust is $400 (including the $30 franking
credit attached to the distribution).
The trust has two beneficiaries, Huy and Andrew. Andrew
is under a legal disability.
Huy is presently entitled to 50 per cent of
the income of the trust estate and Andrew is presently entitled to
40 per cent of the income of the trust estate. Neither Huy nor
Andrew is specifically entitled to any particular class of income. No
beneficiary is presently entitled to the remaining 10 per cent of the
income of the trust estate.
Because no beneficiary has a specific entitlement to
the franked distribution, each beneficiary’s share of the $70 franked
distribution will be determined by reference to their adjusted Division 6
percentage. Huy is entitled to 50 per cent and Andrew to
40 per cent of the income of the trust estate (and no adjustments are
required as there are no capital gains or franked distributions to which
someone is specifically entitled).
Accordingly, Huy has a share of the franked
distribution of $35 ($70 × 50 per cent),
and an attributable distribution of the same amount ($70 × $35/$70)
(see paragraph 2.121).
Under section 207‑57 he also has a share of the
franking credit of $15 ($30 × $35/$70).
Huy includes $35 of the franked distribution and $15
of the franking credits in his assessable income under Subdivision 207‑B.
Under Division 6E, the amount assessed to the
beneficiaries and trustee under Division 6 is calculated as if the $70
dividend and $30 associated franking credit were disregarded for the
purposes of calculating the trust’s taxable income, the $70 franked
distribution was disregarded for the purposes of calculating the income of the
trust estate, and the beneficiaries’ present entitlements exclude their share
of the franked distribution. As such, section 97 of the ITAA 1936
includes in Huy’s assessable income $150 (($185 − $35)/($370 − $70)
× ($400 − $100)) instead of $200 as would otherwise have been the
case.
The total amount included in his assessable income is
$200 ($50 under Subdivision 207‑B — including $15 of franking credits —
and $150 under section 97 of the ITAA 1936).
As Andrew is under a legal disability, the trustee of
the trust is assessed and liable to tax under subsection 98(1) in respect of
Andrew on a total of $160 (including $40 calculated in respect of Andrew’s
share of the franked distribution and franking credit — comprising a $28 share
of the distribution and a $12 share of the franking credit — as a result of
subsection 207‑35(6)).
The trustee is also assessed and liable to tax on the
remaining $40 of the taxable income of the trust under section 99A
(including $10 in respect of its own share of the franked distribution and
franking credit — comprising a $7 share of the distribution and a $3 share of
the franking credit — as a result of subsection 207-35(6)).
Application
of new Division 6E to adjust Division 6 assessable amounts
2.150
Where necessary, Division 6E adjusts the
amount otherwise included in a beneficiary’s assessable income (or assessed to
the trustee) under Division 6 by effectively ignoring any capital gains
and franked distributions of the trust. These amounts are brought to tax under
Subdivision 115‑C and 207‑B respectively.
2.151
The sole effect of Division 6E is to adjust the amount
included in a beneficiary’s assessable income or assessed to the trustee under
Division 6 — it does not adjust the ‘income of the trust estate’, ‘net income
of the trust’ or a beneficiary’s present entitlement to trust income for any
other purpose. For example, Division 6E does not modify the operation of
Division 6 for the purposes of applying section 100A of the
ITAA 1936.
2.152
Division 6E does not ‘unwind’ any increase in a
trustee’s liability under section 98, 99 or 99A of the
ITAA 1936 arising from Subdivisions 115‑C and 207‑B. In other words, an
increase in the trustee’s liability under Subdivision 115‑C and 207‑B
happens after any modification by
Division 6E.
2.153
The primary purpose of Division 6E is to avoid
double taxation on capital gains and franked distributions. Division 6E
also ensures that Division 6 continues to correctly assess a presently
entitled beneficiary on their share of the taxable income of the trust where
they are presently entitled to income other than
capital gains and franked distributions.
2.154
In most instances, adjustments made under
Division 6E result in a reduction of the amount otherwise assessable under
Division 6. However, these adjustments can also result in an increase in the
amount otherwise assessable to a taxpayer in some circumstances. (see paragraphs 2.162
to 2.164).
When
Division 6E applies
2.155
Division 6E applies where:
• the
trust has a positive taxable income; and
• capital
gains (after applying capital losses and any CGT concessions), ‘net’ franked
distributions and/or franking credits are taken into account in working out
that taxable income.
[Schedule 2, item 7, section 102UW
of the ITAA 1936]
2.156
To work out amounts assessable to a beneficiary
(under section 97, 98A or 100), a trustee in respect of a
beneficiary (under section 98) and a trustee under section 99
or 99A, Division 6E requires the trustee to assume that the:
• ‘income
of the trust estate’ instead equals the ‘Division 6E income of the trust
estate’;
• ‘net
income of the trust estate’ instead equals the ‘Division 6E net income of
the trust estate’; and
• amount
of a beneficiary’s present entitlement to the income of the trust estate
instead equals the amount of the beneficiary’s ‘Division 6E present
entitlement to the (Division 6E) income of the trust estate’.
[Schedule 2, item 7,
sections 102UX and 102UY of the ITAA 1936]
Division 6E
income of the trust estate
2.157
The Division 6E income of the trust
estate is the income of the trust estate worked out on the assumption that it
does not include any amounts ‘attributable’ to capital gains (after capital
losses and any CGT concessions), ‘net’ franked distributions or franking
credits. The amount cannot be less than nil, even where the amounts
attributable to capital gains, ‘net’ franked
distributions and franking credits exceed the income of the trust
estate. [Schedule 2, item 7, subsection 102UY(2)
of the ITAA 1936]
Example 2.21
The McGovern Trust has
income of the trust estate of $120, calculated as $100 of rental income plus
$70 of franked distributions less $50 of directly related deductible expenses.
The trust’s ‘Division 6E income of the trust estate’ is $100 — that is, the
income of the trust estate disregarding the $20 attributable to the net franked
distribution.
2.158
The amounts ‘attributable’ to a capital gain,
franked distribution or franking credit may not neatly align with the
components of the ‘income of the trust estate’ calculated for trust purposes.
However, an amount of trust income is generally ‘attributable’ to a capital
gain or net franked distribution where it corresponds to tax amounts of these
items of income.
• For
example, an amount attributable to a capital gain is generally the amount of
net financial benefit arising from the same CGT event that gave rise to the
capital gain for taxation purposes.
• Similarly
for franked distributions, the amount attributable generally corresponds to the
amount of the ‘net’ franked distribution that is taken into account in working
out the taxable income of the trust.
Example 2.22
The Coffee Trust has income of $470,000, made up of
$100,000 rental income, a $70,000 franked distribution and a $300,000 capital
gain (for trust purposes).
The trust’s taxable income is $300,000, calculated as
$100,000 rental income, $70,000 franked distribution plus $30,000 attached
franking credits and a net capital gain of $100,000 (being the $300,000 capital
gain reduced by a prior year net capital loss of $100,000 and the general CGT
50 per cent discount).
Division 6E applies to the trust as it has
positive taxable income and (part of) the capital gain, franked distribution
and franking credits were taken into account in working out that taxable
income. Accordingly, for the purpose of calculating amounts assessed under
Division 6, the trustee assumes that the income of the trust estate
instead equals the ‘Division 6E income of the trust estate’.
The Division 6E income of the trust estate is
$100,000, calculated as $470,000 less $70,000 (the franked distribution) and
less $300,000 (the trust capital gain). (The full trust capital gain is taken
out of the calculation because the prior year net capital loss was not
chargeable against the income of the trust in the first place.)
Division 6E
net income of the trust estate
2.159
The Division 6E net income of the trust
estate is the ‘net income of the trust estate’ worked out on the assumption
that any capital gain (after any capital losses and CGT discounts are applied),
‘net’ franked distribution and franking credits were not taken into account in
working out the net income. As with the ‘Division 6E income of the trust
estate’, the amount cannot be less than nil. [Schedule 2, item 7,
subsection 102UY(3) of the ITAA 1936]
Example 2.23
Continuing from Example 2.22, the Coffee Trust’s
‘Division 6E net income’ is $100,000. This is worked out as the trust’s
taxable income of $300,000 reduced by the $100,000 (the sum of the franked
distribution and attached franking credits) and $100,000 (the capital gain
remaining after losses and discounts are applied).
Division 6E
present entitlement to the income of the trust estate
2.160
A beneficiary’s Division 6E present entitlement to the income of
the trust estate is effectively the amount of ‘Division 6E
income of the trust estate’ to which the beneficiary is presently entitled —
that is, excluding amounts attributable to capital gains and franked
distributions from both the entitlements and the income of the trust estate.
2.161
This present entitlement is worked out as the
amount of the beneficiary’s present entitlement to the income of the trust
estate worked out under Division 6 (without modification), decreased by:
• for
each capital gain taken into account in working out the taxable income of the
trust:
– the
beneficiary’s share of the capital gain as determined under
Subdivision 115‑C, to the extent that it was included in the income of the
trust estate; and
• for
each franked distribution taken into account in working out the taxable income
of the trust:
– the
beneficiary’s share of the franked distribution as determined under
Subdivision 207‑B to the extent that it was included in the income of the
trust estate.
[Schedule 2, item 7,
subsection 102UY(4) of the ITAA 1936]
Example 2.24
Continuing from Example 2.23, and suppose at the end
of the income year the trustee resolves to distribute amounts as follows:
• to
Anthea: all of the rental income ($100,000);
• to
Cameron: all of the franked distribution ($70,000); and
• to
Graeme: all of the capital gain ($300,000).
Anthea’s Division 6E present entitlement to the
Division 6E income of the trust is $100,000 (no part of her present entitlement
is attributable to capital gains or franked distributions). The amount she is
assessed on under section 97 of the ITAA 1936 is therefore $100,000 (as
she has a 100 per cent share of the Division 6E income and therefore
is assessed on 100 per cent of the Division 6E net income).
Cameron’s Division 6E present entitlement to the
Division 6E income of the trust is $0 (after disregarding the franked
distribution). The amount he is assessed on under Division 6 as modified by Division
6E is therefore $0. (He will be assessed on the franked distribution and
attached franking credits under Subdivision 207‑B.)
Graeme also has a Division 6E present entitlement of
$0 (after disregarding the capital gain). The amount he is assessed on under
Division 6 as modified by Division 6E is also $0. (He will be treated as
having an extra capital gain under Subdivision 115‑C.)
Division 6E
may increase a taxpayer’s Division 6 assessable amount
2.162
As noted above, in some circumstances
Division 6E increases the amount that Division 6 includes in a
taxpayer’s assessable income.
2.163
This can only occur for a beneficiary (or trustee)
when:
• another
entity is specifically entitled to an amount of capital gains or (net) franked
distributions of a trust that is included in the ‘income of the trust estate’;
and
• for
all of the other income of the trust, the ‘taxable income’ exceeds the ‘income
of the trust estate’.
2.164
An increase in the amount assessed to one taxpayer
will reflect a corresponding decrease in the amount assessed to another. This
is necessary to ensure that:
• when
a beneficiary is specifically entitled to an amount of a capital gain or (net)
franked distribution, they are only taxed by reference to that amount (unless
they are also presently entitled to other trust income); and
• all
of the taxable income of the trust is brought to tax.
Example 2.25
Aaron is entitled to all of the capital gains of a
trust, and Bennett is entitled to all of the other income of the trust. The
trust deed defines ‘income’ to include capital gains.
In the 2011‑12 income year, the trustee of the trust
made a $100 capital gain (no CGT concessions applied). The trustee also had
$100 of other income for trust purposes. However, due to a timing difference,
the amount of other income assessable for tax purposes is instead $900.
Under the ordinary operation of Division 6, the
income of the trust estate is $200 and the taxable income is $1,000. As Aaron
and Bennett are each entitled to 50 per cent of the ‘income of the
trust estate’, they would each be assessed on $500 under section 97 of the
ITAA 1936.
However, Division 6E applies to adjust the
amounts that would otherwise be included in Aaron and Bennett’s assessable
incomes by effectively ignoring the capital gain.
• The
Division 6E income of the trust is $100 under subsection 102UY(2).
• The
Division 6E net income of the trust is $900 under
subsection 102UY(3).
• Bennett
is presently entitled to all of the Division 6E income of the trust ($100)
under subsection 102UY(4).
The following table
compares each beneficiary’s original and adjusted section 97 amount.
There is no trustee assessment.
|
|
|
|
|
Aaron
|
$500
|
$0
|
|
Bennett
|
$500
|
$900
|
The increase in
Bennett’s assessable income corresponds to the decrease in Aaron’s assessable
income. (Subdivision 115‑C applies to treat Aaron as having an extra capital
gain of $100 as he is specifically entitled to the entire gain.)
Combined
operation of the streaming provisions
2.165
As noted earlier, Division 6 is the starting
point for the taxation of trust income. However, the amounts assessable to
beneficiaries (or the trustee) may be modified by the rules in
Division 6E.
2.166
Then, where a trustee makes capital gains and
derives franked distributions, Subdivisions 115‑C and 207‑B both apply and
operate simultaneously and independently.
2.167
Although the two Subdivisions apply independently,
they can interact when a trust has both capital gains and franked
distributions. In particular, each Subdivision depends on:
• the
sum of capital gains made by the trustee, and the net capital gain of the
trust;
• the
sum of franked distributions derived by the trustee (net of directly relevant
deductions); and
• the
beneficiaries’ (and trustee’s) ‘adjusted Division 6 percentage’.
– This
share depends on the extent to which beneficiaries are specifically entitled to
capital gains and franked
distributions.
2.168
The following examples provide detailed,
step-by-step calculations of amounts assessable to beneficiaries (and the
trustee if relevant) under Division 6 (as adjusted by Division 6E)
and Subdivisions 115‑C and 207‑B.
2.169
Each example uses the same general facts (see
Example 2.26). The examples differ primarily in the way ‘income’ is defined in
the trust deed.
• In
the first example, the trust deed does not define income and therefore takes
its ordinary meaning — in particular it does not include capital gains (see
Example 2.27).
– The
second example continues the first example, but assumes carry-forward tax
losses to demonstrate how taxable amounts relating to capital gains and franked
distributions may be rateably reduced (see Example 2.28).
• In
the third example the trust deed defines the income of the trust to include
ordinary income plus net capital gains (see Example 2.29).
• In
the fourth example the trust deed defines the income of the trust to include
ordinary income plus capital gains according to accounting concepts (see
Example 2.30).
Example 2.26
A trust has four beneficiaries: Ash, Bradshaw, Claire and
Dawson.
In the 2010‑11 income year, the trust derived the
following amounts.
• Net
rental income of $100,000.
• A
first franked distribution of $70,000 (with $30,000 franking credits attached),
with $50,000 of directly related deductible expenses.
• A
second franked distribution of $70,000 (with $30,000 franking credits
attached), with no directly related deductible expenses.
• A
capital gain of $200,000 that is eligible for the CGT discount.
• A
capital gain of $100,000 that is not eligible for the CGT discount.
The trust had a (prior year) net capital loss of
$50,000 carried forward into the 2010‑11 income year.
The trustee chooses to apply the net capital loss
against the $100,000 capital gain that is not eligible for the discount.
The section 95 net income of the trust is
therefore $400,000 —calculated as $100,000 net rental income + $90,000 net
franked distributions + $60,000 franking credits + $150,000 net capital gain.
The Division 6E net income of the trust is
$100,000 (the net rental income) disregarding all of the taxable income
attributable to the capital gains, franked distributions and franking credits
(subsection 102UY(3) of the ITAA 1936).
Example 2.27
Using the general facts in Example 2.26, and assume the
trust deed does not define ‘income’, which therefore takes its ordinary meaning
— that is, it does not include capital gains made by the trust. The trust’s
distributable income is therefore $190,000 ($100,000 of net rental income plus
($140,000 – $50,000) of ‘net’ franked distributions).
In accordance with a power under the deed, the trustee
resolves to make income and capital distributions in the following amounts.
• To
Ash $50,000 of ‘income’ and a $100,000 capital distribution that is specified
to be attributable to the discount capital gain.
• To
Bradshaw: a $50,000 capital distribution specified to be attributable to the
non‑discount capital gain (the other $50,000 is retained to replenish the trust
corpus for the prior year capital loss).
• To
Claire: $20,000 of income specified to be wholly attributable to the first
(net) franked distribution.
• To
Dawson: the balance of distributable income. (She is therefore entitled to
$120,000 ($190,000 − $50,000 − $20,000.)
Step 1 —
Apply Division 6 unmodified by Division 6E
The following table summarises
the respective shares of the trust income and taxable income of each
beneficiary under Division 6 (ignoring the effect of Division 6E).
|
|
|
|
|
|
Ash
|
$50,000
|
26.3%
($50,000/$190,000)
|
$105,263
|
|
Bradshaw
|
$0
|
0%
($0/$190,000)
|
$0
|
|
Claire
|
$20,000
|
10.5%
($20,000/$190,000)
|
$42,105
|
|
Dawson
|
$120,000
|
63.2%
($120,000/$190,000)
|
$252,632
|
|
Total
|
$190,000
|
100%
|
$400,000
|
Step
2 — calculate beneficiaries’ adjusted Division 6 percentage
Before applying Subdivisions 115‑C
and 207‑B, it is convenient to calculate ‘adjusted Division 6 percentages’
for beneficiaries.
As a result of the distributions, Ash is specifically
entitled to 50 per cent of the discount capital gain. Bradshaw is
specifically entitled to all of the non‑discount capital gain. Claire is
specifically entitled to all of the first (net) franked distribution.
There is $100,000 of the discount capital gain and a
$70,000 franked distribution (with a $30,000 franking credit attached) to which
no beneficiary is specifically entitled. However, only the franked
distribution is included in the income of the trust.
Excluding amounts to
which beneficiaries are specifically entitled, the ‘adjusted income’ of the
trust is $170,000 ($100,000 net rental income plus the second $70,000 franked
distribution). Each beneficiary’s adjusted Division 6 percentage of that
‘adjusted income’ is as follows.
|
|
|
|
|
Ash
|
$50,000
|
29.4%
|
|
Bradshaw
|
$0
|
0%
|
|
Claire
|
$0
|
0%
|
|
Dawson
|
$120,000
|
70.6%
|
|
Total
|
$170,000
|
100%
|
Step 3 —
apply Subdivision 115‑C
Applying
Subdivision 115‑C, capital gains are allocated to a beneficiary based on
their specific entitlement and adjusted Division 6 percentage (from step
2). (All columns relate to the $200,000 discount capital gain except
Bradshaw’s, which relates to the $100,000 gain).
|
|
|
|
|
|
|
Specific entitlement
115‑227(a)
|
$100,000
|
$100,000
|
N/A
|
$0
|
|
Adjusted Division 6 percentage share
115‑227(b)
|
$29,400
|
$0
|
N/A
|
$70,600
|
|
Share of capital gain (amount) 115‑227
|
$129,400
|
$100,000
|
N/A
|
$70,600
|
|
(Total) capital gain
|
$200,000
|
$100,000
|
N/A
|
$200,000
|
|
Fraction of the gain
115-225(1)(b)
|
64.7%
|
100%
|
N/A
|
35.3%
|
|
Tax related to gain
115-225(1)(a)
|
$100,000
|
$50,000
|
N/A
|
$100,000
|
|
Attributable gain
115-225(1)
|
$64,700
|
$50,000
|
N/A
|
$35.300
|
|
Gross up?
115-215(3)
|
Yes
|
No
|
N/A
|
Yes
|
|
Extra capital gain
115-215(3)
|
$129,400
|
$50,000
|
N/A
|
$70,600
|
Note that Bradshaw is
specifically entitled to all of the (gross) capital gain of $100,000 because he
received all of the net financial benefit relating to the gain after the
trustee applied losses for trust purposes in a way consistent with the
application of capital losses for tax purposes.
Ash, Bradshaw and Dawson can then apply any capital
losses or net capital loss they have to reduce these extra capital gains.
Since the extra capital gain made by Ash and Dawson was made in respect of a
discount capital gain of the trust and they are individuals, they would be able
to apply the CGT discount to any amount remaining (see existing
paragraph 115‑215(4)(a)).
Step 4 —
apply Subdivision 207‑B
Applying Subdivision 207‑B, franked distributions
are allocated to a beneficiary based on their specific entitlement and adjusted
Division 6 percentage. (All columns relate to the $70,000 franked
distribution except Claire’s, which relates to the $20,000 net franked
distribution.)
|
|
|
|
|
|
|
Specific entitlement
207‑55(4)(a)
|
$0
|
N/A
|
$70,000
|
$0
|
|
Adjusted Division 6 percentage share
207‑55(4)(b)
|
$20,580
|
N/A
|
$0
|
$49,420
|
|
Share of franked distribution (amount)
207‑55 (via table)
|
$20,580
|
N/A
|
$70,000
|
$49,420
|
|
Fraction
of the distribution
207-37(1)(b)
|
29.4%
|
N/A
|
100%
|
70.6%
|
|
Tax
related to distribution
207-37(1)(a)
|
$70,000
|
N/A
|
$20,000
|
$70,000
|
|
Franking
credit
207-35(4)(b)(i)
|
$8,820
|
N/A
|
$30,000
|
$21,180
|
|
Attributable franked distribution
207-35(4)(b)(ii)
|
$20,580
|
N/A
|
$20,000
|
$49,420
|
Each beneficiary is
assessed on their attributable franked distribution and their share of the
franking credits under paragraph 207‑35(4)(b).
Step
5 — recalculate assessable amounts using Division 6E
The beneficiaries’
assessable amounts under section 97 of the ITAA 1936 are adjusted by
the operation of Division 6E, based on the amounts calculated under
section 102UY of the ITAA 1936.
• The
Division 6E income of the trust estate is $100,000, because the $90,000
attributable to the franked distributions is disregarded.
• The
Division 6E net income is also $100,000 (from the general facts set out in Example
2.26).
• Ash’s
Division 6E present entitlement is $29,420 (calculated under
subsection 102UY(4) of the ITAA 1936 as his present entitlement to
trust income of $50,000 minus his share of franked distributions of $20,580 —
note that his share of the capital gain of the trust is not part of trust
income).
• Bradshaw
and Claire have no Division 6E present entitlement as their only
entitlements were to capital gains and franked distributions respectively.
• Dawson’s
Division 6E present entitlement is $70,580 (calculated under
subsection 102UY(4) of the ITAA 1936 as her present entitlement to
trust income of $120,000 minus her share of franked distributions of $49,420).
The modified
amounts assessable under Division 6 are as follows:
|
|
|
|
|
|
Ash
|
$29,420
|
29.4%
($29,420/$100,000)
|
$29,420
|
|
Bradshaw
|
$0
|
0%
|
$0
|
|
Claire
|
$0
|
0%
|
$0
|
|
Dawson
|
$70,580
|
70.6%
($70,580/$100,000)
|
$70,580
|
Step 6
— overall result
The following
table sets out for each beneficiary the overall tax treatment of the amounts
they received from the trust. (It assumes for convenience that beneficiaries
had no other capital gains and no capital losses or net capital loss, and are
eligible for the franking credits.)
|
|
|
|
|
|
|
|
Adjusted
section 97 assessable amount
|
$29,420
|
$0
|
$0
|
$70,580
|
$100,000
|
|
Net capital gain
102‑5
|
$64,700
|
$50,000
|
$0
|
$35,300
|
$150,000
|
|
Attributable franked distribution
207-37(1)(a)
|
$20,580
|
$0
|
$20,000
|
$49,420
|
$90,000
|
|
Franking credit
207-35(4)(b)(i)
|
$8,820
|
$0
|
$30,000
|
$21,180
|
$60,000
|
|
Total assessable income
|
$123,520
|
$50,000
|
$50,000
|
$176,480
|
$400,000
|
|
Amount received from the trust
|
$150,000
|
$50,000
|
$20,000
|
$120,000
|
$340,000
|
Note that the total
assessable income equals the net income of the trust. The total amounts
received from the trust equals the trust income of $190,000 plus $150,000 of
capital distributions to Ash and Bradshaw.
Example 2.28
Following on from Example 2.27, suppose that the
trust had carry forward tax losses of $280,000. The taxable income of the
trust is therefore $120,000 ($400,000 − $280,000). (The trust income does
not change and assume that the trustee’s resolutions also do not change.)
The sum of the net capital gain and (net) franked
distributions is $240,000. As this exceeds the net income of the trust
(excluding franking credits) of $60,000, the taxable income of the trust
attributable to each capital gain and franked distribution is reduced by three
quarters ($60,000/$240,000) because of subsections 115‑225(2) and (3) and
subsections 207‑37(2) and (3).
Therefore:
• Ash
reduces his extra capital gain to $32,350 ($129,400/4) and his assessable
franked distribution to $5,145 ($20,580/4).
• Bradshaw
reduces his extra capital gain to $12,500 ($50,000/4).
• Claire
reduces her attributable franked distribution to $5,000 ($20,000/4).
• Dawson
reduces her extra capital gain to $17,650 ($70,600/4) and his attributable
franked distribution to $12,355 ($49,420/4).
Note that this rateable reduction does not reduce the
franking credits attached to the franked distributions.
Applying Division 6E, the ‘Division 6E net
income of the trust’ disregarding net capital gains and net franked
distributions is $0. Therefore, regardless of beneficiaries’ Division 6E
present entitlement, their adjusted section 97 assessable income is $0.
The following table sets
out each beneficiary’s overall tax treatment after taking into account the
carry-forward tax loss.
|
|
|
|
|
|
|
|
Adjusted section 97
assessable amount
|
$0
|
$0
|
$0
|
$0
|
$0
|
|
Net capital gain
102‑5
|
$16,175
|
$12,500
|
$0
|
$8,825
|
$37,500
|
|
Attributable franked distribution
207-37(1)(a)
|
$5,145
|
$0
|
$5,000
|
$12,355
|
$22,500
|
|
Franking credit
207-35(4)(b)(i)
|
$8,820
|
$0
|
$30,000
|
$21,180
|
$60,000
|
|
Total assessable income
|
$30,140
|
$12,500
|
$35,000
|
$42,360
|
$120,000
|
Note again that total
assessable income equals the taxable income of the trust after taking into
account the carry‑forward tax loss.
Example 2.29
Using the general facts in Example 2.26, and assume
that the trust deed defines ‘income’ to include the net capital gains of the
trust (as defined in the ITAA 1997). The trust’s distributable income is
therefore $340,000 ($100,000 of net rental income, $90,000 of ‘net’ franked
distributions and $150,000 net capital gains).
In accordance with a power under the deed, the trustee
resolves to make income distributions in the following amounts.
• To
Ash: $150,000 of income, of which $100,000 is purported to be attributable to
the taxable part of the discount capital gain.
• To
Bradshaw: $50,000 of income specified to be attributable to the non‑discount
capital gain (the other $50,000 is retained to replenish the corpus for a prior
year capital loss).
• To
Claire: $20,000 of income specified to be wholly attributable to the first
(net) franked distribution.
•
To Dawson: the balance of distributable income.
(She is therefore entitled to $120,000
($340,000 − $150,000 − $50,000 − $20,000).)
Step
1 — apply Division 6 unmodified by Division 6E
The following table summarises
the respective shares of the trust income and taxable income of each
beneficiary under Division 6 (ignoring the effect of Division 6E).
|
|
|
|
|
|
Ash
|
$150,000
|
44.1%
$150,000/$340,000)
|
$176,471
|
|
Bradshaw
|
$50,000
|
14.7%
($50,000/$340,000)
|
$58,824
|
|
Claire
|
$20,000
|
5.9%
($20,000/$340,000)
|
$23,529
|
|
Dawson
|
$120,000
|
35.3%
($120,000/$340,000)
|
$141,176
|
|
Total
|
$340,000
|
100%
|
$400,000
|
Step 2
— calculate beneficiaries’ adjusted Division 6 percentage
Although the trustee
purported to make Ash specifically entitled to all of the taxable part of the
discount capital gain, he only received half of the net economic benefit
referable to the capital gain. He is therefore only specifically entitled to
half of the $200,000 capital gain.
Further, because the trust income includes net capital gains, only half of Ash’s
specific entitlement to the discount capital gain was included in the trust
income.
The ‘adjusted income of the trust estate’ is $220,000
— that is, the trust income of $340,000 less $50,000 of Ash’s entitlement and
less Bradshaw’s $50,000 entitlement (since, in both cases, only half of the
capital gain was included in trust income), and less Claire’s $20,000.
Ash’s present entitlement to ‘adjusted income’ is
$100,000 (because only $50,000 of his specific entitlement was part of trust
income and therefore disregarded). Dawson’s present entitlement to the
‘adjusted income’ is $120,000.
Each beneficiary’s share
of that ‘adjusted income’ is as follows.
|
|
|
|
|
Ash
|
$100,000
|
45.5%
|
|
Bradshaw
|
$0
|
0%
|
|
Claire
|
$0
|
0%
|
|
Dawson
|
$120,000
|
54.5%
|
|
Total
|
$220,000
|
100%
|
Step
3 — apply Subdivision 115‑C
Applying
Subdivision 115‑C, capital gains are allocated to a beneficiary based on
their specific entitlement and adjusted Division 6 percentage (from
step 2). (All columns relate to the $200,000 capital gain except
Bradshaw’s, which relates to the $100,000 gain.)
|
|
|
|
|
|
|
Specific
entitlement
115‑227(a)
|
$100,000
|
$100,000
|
N/A
|
$0
|
|
Adjusted
Division 6 percentage share
115‑227(b)
|
$45,500
|
$0
|
N/A
|
$54,500
|
|
Share
of capital gain (amount) 115‑227
|
$145,500
|
$100,000
|
N/A
|
$54,500
|
|
(Total)
capital gain
|
$200,000
|
$100,000
|
N/A
|
$200,000
|
|
Fraction
of the gain
115‑225(1)(b)
|
72.8%
|
100%
|
N/A
|
27.3%
|
|
Tax
related to gain
115‑225(1)(a)
|
$100,000
|
$50,000
|
N/A
|
$100,000
|
|
Attributable
gain
115‑225(1)
|
$72,750
|
$50,000
|
N/A
|
$27,250
|
|
Gross
up
115‑215(3)
|
Yes
|
No
|
N/A
|
Yes
|
|
Extra
capital gain
115‑215(3)
|
$145,500
|
$50,000
|
N/A
|
$54,500
|
Step 4
— apply Subdivision 207‑B
Applying
Subdivision 207‑B, franked distributions are allocated to a beneficiary
based on their specific entitlement and adjusted Division 6 percentage.
(All columns relate to the $70,000 franked distribution except Claire’s, which
relates to the $20,000 net franked distribution.)
|
|
|
|
|
|
|
Specific
entitlement
207‑55(4)(a)
|
$0
|
N/A
|
$70,000
|
$0
|
|
Adjusted
Division 6 percentage share
207‑55(4)(b)
|
$31,850
|
N/A
|
$0
|
$38,150
|
|
Share of
franked distribution (amount)
207‑55 (via
table)
|
$31,850
|
N/A
|
$70,000
|
$38,150
|
|
Fraction of
the distribution
207‑37(1)(b)
|
45.5%
|
N/A
|
100%
|
54.5%
|
|
Tax related
to distribution
207‑37(1)(a)
|
$70,000
|
N/A
|
$20,000
|
$70,000
|
|
Franking
credit
207‑35(4)(b)(i)
|
$13,650
|
N/A
|
$30,000
|
$16,350
|
|
Attributable
franked distribution
207‑35(4)(b)(ii)
|
$31,850
|
N/A
|
$20,000
|
$38,150
|
Step 5
— recalculate assessable amounts using Division 6E
The beneficiaries’
assessable amounts under section 97 of the ITAA 1936 are adjusted by
the operation of Division 6E, based on the amounts calculated under
section 102UY of the ITAA 1936.
•
The Division 6E income of the trust estate is
still $100,000, because the $150,000 attributable to the capital gains and the
$90,000 attributable to the franked distributions are disregarded. The
Division 6E net income is also still $100,000.
• Ash’s
Division 6E present entitlement is $45,400 — calculated under
subsection 102UY(4) of the ITAA 1936 as his present entitlement to trust
income of $150,000 minus his $31,850 share of franked distributions and minus
$72,750 (since only half of his $145,500 share of the capital gain is included
in trust income).
• Dawson’s
Division 6E present entitlement is $54,600 — calculated under
subsection 102UY(4) of the ITAA 1936 as her present entitlement to trust
income of $120,000 minus her $38,150 share of franked distributions and minus
$27,250 (since only half of her share of the capital gain is included in trust
income).
The modified amounts
assessable under Division 6 are as follows.
|
|
|
|
|
|
Ash
|
$45,400
|
45.4%
($45,400/$100,000)
|
$45,400
|
|
Bradshaw
|
$0
|
0%
|
$0
|
|
Claire
|
$0
|
0%
|
$0
|
|
Dawson
|
$54,600
|
54.6%
($54,600/$100,000)
|
$54,600
|
Step 6
— overall result
The following
table sets out for each beneficiary the overall tax treatment of the amounts
they received from the trust. (It assumes for convenience that beneficiaries
had no other capital gains and no capital losses or net capital loss, and are
eligible for the franking credits.)
|
|
|
|
|
|
|
|
Adjusted
section 97 assessable amount
|
$45,400
|
$0
|
$0
|
$54,600
|
$100,000
|
|
Net
capital gain
Section 102‑5
|
$72,750
|
$50,000
|
$0
|
$27,250
|
$150,000
|
|
Attributable
franked distribution
207-37(1)(a)
|
$31,850
|
$0
|
$20,000
|
$38,150
|
$90,000
|
|
Franking credit
207-35(4)(b)(i)
|
$13,650
|
$0
|
$30,000
|
$16,350
|
$60,000
|
|
Total assessable income
|
$163,650
|
$50,000
|
$50,000
|
$136,350
|
$400,000
|
|
Amount received from the trust
|
$150,000
|
$50,000
|
$20,000
|
$120,000
|
$340,000
|
Example 2.30
Using the general facts
in Example 2.26, and assuming the trust deed defines ‘income’ to include gross
capital gains made by the trust.
The trust’s distributable
income is therefore $490,000 ($100,000 of net rental income plus $90,000 of
‘net’ franked distributions plus $300,000 of gross capital gains). Note that
the trustee has not applied losses against any of the trust capital gains in
determining the trust income.
In accordance with a power under the deed, the trustee
resolves to make income distributions in the following amounts.
• To
Ash: $150,000 of ‘income’, of which $100,000 is specified to be attributable
to the discount capital gain.
• To
Bradshaw: $50,000 of income specified to be attributable to the non‑discount
capital gain.
• To
Claire: $20,000 of income specified to be wholly attributable to the first
(net) franked distribution.
• To
Dawson: the balance of distributable income. (She is therefore entitled to
$270,000 ($490,000 − $150,000 − $50,000 − $20,000).)
Step 1
— apply Division 6 unmodified by Division 6E
The following table summarises
the respective shares of the trust income and taxable income of each
beneficiary under Division 6 (ignoring the effect of Division 6E).
|
|
|
|
|
|
Ash
|
$150,000
|
30.6%
($150,000/$490,000)
|
$122,449
|
|
Bradshaw
|
$50,000
|
10.2%
($50,000/$490,000)
|
$40,816
|
|
Claire
|
$20,000
|
4.1%
($20,000/$490,000)
|
$16,327
|
|
Dawson
|
$270,000
|
55.1%
($270,000/$490,000)
|
$220,408
|
|
Total
|
$490,000
|
100%
|
$400,000
|
Step 2
— calculate adjusted Division 6 percentage
In this example, the
trustee has not applied losses against any of the trust capital gains for the
purposes of working out the distributable income. Bradshaw is therefore only
specifically entitled to half ($50,000) of the non-discount capital gain
because he received only half of the net financial benefit of $100,000. (The
net capital loss will still reduce the capital gain for tax purposes.)
Hence, there is $100,000 of the discount capital gain,
$50,000 of the non‑discount capital gain and a $70,000 franked distribution
(with a $30,000 franking credit attached) to which no beneficiary is
specifically entitled. There is also $100,000 of net rental income.
The ‘adjusted income of
the trust estate’ is therefore $320,000. Each beneficiary’s share of that
‘adjusted income’ is as follows.
|
|
|
|
|
Ash
|
$50,000
|
15.6%
|
|
Bradshaw
|
$0
|
0%
|
|
Claire
|
$0
|
0%
|
|
Dawson
|
$270,000
|
84.4%
|
|
Total
|
$320,000
|
100%
|
Step 3
— apply Subdivision 115‑C
Applying
Subdivision 115‑C, capital gains are allocated to a beneficiary based on
their specific entitlement and adjusted Division 6 percentage (from step
2). In this example, the calculations are shown on a gain by gain basis for
additional clarity.
First gain — capital gain of $200,000 (discount gain)
|
|
|
|
|
|
|
Specific
entitlement
115‑227(a)
|
$100,000
|
N/A
|
N/A
|
$0
|
|
Adjusted
Division 6 percentage share
115‑227(b)
|
$15,600
|
N/A
|
N/A
|
$84,400
|
|
Share of
capital gain (amount) 115‑227
|
$115,600
|
N/A
|
N/A
|
$84,400
|
|
(Total)
capital gain
|
$200,000
|
N/A
|
N/A
|
$200,000
|
|
Fraction of
the gain
115‑225(1)(b)
|
57.8%
|
N/A
|
N/A
|
42.2%
|
|
Tax related
to gain
115‑225(1)(a)
|
$100,000
|
N/A
|
N/A
|
$100,000
|
|
Attributable
gain
115‑225(1)
|
$57,800
|
N/A
|
N/A
|
$42,200
|
|
Gross up
115‑215(3)
|
Yes
|
N/A
|
N/A
|
Yes
|
|
Extra
capital gain
115‑215(3)
|
$115,600
|
N/A
|
N/A
|
$84,400
|
Second gain — capital gain of $100,000 (non‑discount)
|
|
|
|
|
|
|
Specific entitlement
115‑227(a)
|
$0
|
$50,000
|
N/A
|
$0
|
|
Adjusted
Division 6 percentage share
115‑227(b)
|
$7,800
|
$0
|
N/A
|
$42,200
|
|
Share of
capital gain (amount) 115‑227
|
$7,800
|
$50,000
|
N/A
|
$42,200
|
|
(Total)
capital gain
|
$100,000
|
$100,000
|
N/A
|
$100,000
|
|
Fraction of
the gain
115‑225(1)(b)
|
7.8%
|
50%
|
N/A
|
42.2%
|
|
Tax related
to gain
115‑225(1)(a)
|
$50,000
|
$50,000
|
N/A
|
$50,000
|
|
Attributable
gain
115‑225(1)
|
$3,900
|
$25,000
|
N/A
|
$21,100
|
|
Gross up
115‑215(3)
|
No
|
No
|
N/A
|
No
|
|
Extra
capital gain
115‑215(3)
|
$3,900
|
$25,000
|
N/A
|
$21,100
|
Step 4 — apply
Subdivision 207‑B
Applying Subdivision 207‑B, franked distributions
are allocated to a beneficiary based on their specific entitlement and adjusted
Division 6 percentage. (All columns relate to the $70,000 franked
distribution except Claire’s, which relates to the $20,000 net franked
distribution).
|
|
|
|
|
|
|
Specific entitlement
207‑55(4)(a)
|
$0
|
N/A
|
$70,000
|
$0
|
|
Adjusted Division 6 percentage share
207‑55(4)(b)
|
$10,920
|
N/A
|
$0
|
$59,080
|
|
Share of
franked distribution (amount)
207‑55 (via
table)
|
$10,920
|
N/A
|
$70,000
|
$59,080
|
|
Fraction of
the distribution
207‑37(1)(b)
|
15.6%
|
N/A
|
100%
|
84.4%
|
|
Tax related
to distribution
207‑37(1)(a)
|
$70,000
|
N/A
|
$20,000
|
$70,000
|
|
Franking
credit
207‑35(4)(b)(i)
|
$4,680
|
N/A
|
$30,000
|
$25,320
|
|
Attributable
franked distribution
207‑35(4)(b)(ii)
|
$10,920
|
N/A
|
$20,000
|
$59,080
|
Step 5 – recalculate
assessable amounts using Division 6E
The beneficiaries’
assessable amounts under section 97 of the ITAA 1936 are adjusted by
the operation of Division 6E, based on the amounts calculated under
section 102UY of the ITAA 1936.
•
The Division 6E income of the trust estate is still
$100,000, because everything except the net rental income is disregarded. The
Division 6E net income is also still $100,000.
•
Ash’s Division 6E present entitlement is $15,680
(calculated under subsection 102UY(4) of the ITAA 1936 as his present
entitlement to trust income of $150,000 minus his $123,400 share of capital
gains ($115,600 plus $7,800) and his $10,920 share of franked distributions).
• Dawson’s
Division 6E present entitlement is $84,320 (calculated under
subsection 102UY(4) of the ITAA 1936 as her present entitlement to
trust income of $270,000 minus her $126,600 share of capital gains ($84,400
plus $42,200) and her $59,080 share of franked distributions).
The modified amounts
assessable under Division 6 are as follows.
|
|
|
|
|
|
Ash
|
$15,680
|
15.7%
($15,680/$100,000)
|
$15,680
|
|
Bradshaw
|
$0
|
0%
|
$0
|
|
Claire
|
$0
|
0%
|
$0
|
|
Dawson
|
$84,320
|
84.3%
($84,320/$100,000)
|
$84,320
|
Step
6 — overall result
The following
table sets out for each beneficiary the overall tax treatment of the amounts
they received from the trust. (It assumes for convenience that beneficiaries
had no other capital gains and no capital losses or net capital loss, and are
eligible for the franking credits.)
|
|
|
|
|
|
|
|
Adjusted section 97 assessable amount
|
$15,680
|
$0
|
$0
|
$84,320
|
$100,000
|
|
Net capital gain
102‑5
|
$61,700
|
$25,000
|
$0
|
$63,300
|
$150,000
|
|
Attributable franked distribution
207-37(1)(a)
|
$10,920
|
$0
|
$20,000
|
$59,080
|
$90,000
|
|
Franking
credit
207-35(4)(b)(i)
|
$4,680
|
$0
|
$30,000
|
$25,320
|
$60,000
|
|
Total assessable income
|
$92,980
|
$25,000
|
$50,000
|
$232,020
|
$400,000
|
|
Amount
received from the trust
|
$150,000
|
$50,000
|
$20,000
|
$270,000
|
$490,000
|
Specific anti-avoidance rules targeting the use of
exempt beneficiaries to inappropriately reduce the tax payable on the taxable
income of a trust
2.170
The amendments in this Schedule introduce two
specific anti‑avoidance rules into the ITAA 1936. Both are designed to prevent
exempt beneficiaries being used to inappropriately reduce the amount of tax
payable on the taxable income of a trust.
2.171
These rules do not apply to a trust that is a MIT
(or a trust that is treated in the same way as a MIT for the purposes of Division 275)
— even where the trustee of the MIT chooses to apply the other amendments in
this Schedule that relate to the streaming of capital gains and franked
distributions. [Schedule 2, item 6, subsections 100AA(7) and 100AB(8)
of the ITAA 1936]
2.172
For other trusts, these rules may be triggered if a
beneficiary that is presently entitled to income is an exempt entity, other
than an ‘exempt Australian government agency’.
•
As set out in subsection 6(1) of the
ITAA 1936 and subsection 995‑1(1) an ‘exempt entity’ includes an
entity whose income is exempt from income tax.
•
An ‘exempt Australian government agency’ includes
the Commonwealth, a state or a territory; and a Commonwealth, state or
territory authority whose income is exempt as defined in subsection 995‑1(1).
[Schedule 2, item 6, paragraphs 100AA(1)(b) and 100AB(1)(b)
of the ITAA 1936]
2.173
Broadly, the first rule (section 100AA of the
ITAA 1936) treats an exempt entity that has not been notified of their
present entitlement to income of the trust estate, within two months of the end
of the income year, as not being presently entitled to that amount. [Schedule
2, item 6, subsections 100AA(1) to (3) of the ITAA 1936]
2.174
Broadly, the second rule (section 100AB of the
ITAA 1936) applies where an exempt entity’s adjusted share of the income
of the trust estate exceeds a prescribed benchmark percentage. Where this
occurs, the exempt entity is treated as not being presently entitled to the
‘excess’. [Schedule 2, item 6, subsections 100AB(1) and (2)
of the ITAA 1936]
2.175
Under both rules, the trustee is assessed under
section 99A of the ITAA 1936 on that share of the trust’s taxable
income that corresponds to the share of the income to which the beneficiary is
treated as not being presently entitled. [Schedule 2, item 6,
subsections 100AA(3) and 100AB(2) of the ITAA 1936]
2.176
As these rules apply to, and potentially adjust, a
beneficiary’s present entitlement to income of a trust estate, they apply
before any of the modifications by Division 6E to amounts assessable under
Division 6.
Exempt
entity not notified of (or paid) their entitlement
2.177
Section 100AA of the ITAA 1936 ensures
that where an exempt entity is not aware of their present entitlement to income
of the trust estate, the trustee rather than the exempt entity is liable to pay
tax on the taxable income of the trust that relates to that present entitlement.
2.178
Section 100AA of the ITAA 1936 applies
where:
• an
exempt entity is presently entitled to an amount of the income of a trust
estate;
• the
exempt entity is not an exempt ‘Australian government agency’ as defined in
subsection 995‑1(1); and
• the
trustee has not within two months of the end of the relevant income year
either:
– notified
the exempt entity in writing of their present entitlement; or
– paid
the exempt entity the entire present entitlement.
[Schedule 2, item 6, subsection 100AA(1)
of the ITAA 1936]
2.179
Written notice of an exempt entity’s present
entitlement may take the form of a statement setting out an entitlement that is
quantifiable (for example a percentage of the income of the trust estate to
which the entity is presently entitled). That is, there is no requirement in
these amendments that the trustee provide the exempt entity with the actual
dollar amount to which the entity is presently entitled. [Schedule
2, item 6, paragraph 100AA(1)(c) of the ITAA 1936]
2.180
Payment of an amount of the exempt entity’s present
entitlement is, to the extent of the payment, taken to be written notice of the
entity’s present entitlement. [Schedule 2, item 6, subsection 100AA(2)
of the ITAA 1936]
2.181
Where section 100AA applies, the exempt entity
is treated as not being presently entitled, and never having been presently
entitled, to income of the trust estate to the extent that the entity was
neither notified nor paid that entitlement. [Schedule 2, item 6, subsection 100AA(3)
of the ITAA 1936]
2.182
The trustee of the trust is then assessed and
liable to pay tax under section 99A of the ITAA 1936 on the amount of
the taxable income of the trust estate that is attributable to the present
entitlement effectively cancelled by the application of
subsection 100AA(3) of the ITAA 1936 (unless the Commissioner of
Taxation (Commissioner) exercises the discretion provided for in subsection 100AA(4)
of the ITAA 1936). [Schedule 2, item 6, subsection 100AA(4)
of the ITAA 1936]
Example 2.31
In the 2010‑11 income year, the Daley Trust generated
$100,000 of rental income. The trust has no other income or expenses and its
taxable income is therefore $100,000.
The trustee of the Daley Trust makes the Philips
Trust, a charitable entity, presently entitled to all of the rental income. Ignoring
the anti‑avoidance rule, the Philips Trust would be notionally assessed on all
of the trust’s taxable income of $100,000, although all of that income would be
exempt from tax.
However, the Daley Trust fails to provide the Philips
Trust with written notice of its entitlement before 31 August 2011 and
only makes a payment of $50,000 to the Philips Trust before that date.
As the Philips Trust is unaware of its full present
entitlement it is only notionally assessed on $50,000. However, the trustee of
the Daley Trust is assessed and liable to pay tax under section 99A of the
ITAA 1936 on the remaining $50,000 of the trust’s taxable income
2.183
The Commissioner has a discretion to disregard the
failure of the trustee to notify the exempt entity of the present entitlement
(or pay that entitlement) where he is of the opinion that it would be
unreasonable to treat the exempt entity as not being presently entitled to any
amount that was neither notified nor paid, having taken into account the
factors set out in subsection 100AA(5) of the ITAA 1936. The
Commissioner has been provided with this discretion to deal with unfair
consequences arising from the application of this anti-avoidance provision. [Schedule
2, item 6, subsections 100AA(4) and (5) of the ITAA 1936]
2.184
Where the Commissioner exercises this discretion,
the exempt entity is assessed in accordance with the ordinary operation of
Division 6 (as then adjusted by Division 6E and Subdivisions 115‑C
and 207‑B).
Example 2.32
In the 2010‑11 income year, the Smith Trust generated $10,000
of interest income. The trust has no other income or expenses and its taxable
income is therefore $10,000.
The trustee of the Smith Trust makes the Quay Trust, a
charitable entity, presently entitled to all of the interest income. Ignoring
the anti‑avoidance rule, the Quay Trust would be notionally assessed on all of
the trust’s taxable income of $10,000 (although that income would be exempt
from tax).
However, the Smith Trust is unaware that the Quay
Trust is an exempt entity until 30 September 2011 and therefore does
not inform the Quay Trust of its entitlement before 31 August 2011,
but rather at the (later) time when its accounts are prepared and it notifies
all beneficiaries of their entitlements for trust purposes. When the Smith
Trust becomes aware that the Quay Trust is an exempt entity it takes immediate
action to notify the Quay Trust of its entitlement.
As the Smith Trust has taken immediate action to
notify the Quay Trust of its entitlement, and it was not unreasonable for the
Smith Trust to be unaware of the Quay Trust’s taxation status, the Commissioner
decides to exercise his discretion under subsection 100AA(4) of the
ITAA 1936 to disregard the failure of the trustee of the Smith Trust to
comply with subsection 100AA(1) of the ITAA 1936.
Therefore, the Quay Trust is notionally assessed on
all of the Smith Trust’s taxable income of $10,000. Had the Commissioner not
exercised his discretion, the trustee of the Smith Trust would have been
assessed and liable to pay tax under section 99A of the ITAA 1936 on
all of its taxable income of $10,000.
2.185
Subsection 100AA(6) of the ITAA 1936
applies to ensure that where the application of section 99A is triggered,
these amendments apply in the same way for both non-resident and resident trust
estates. [Schedule 2,
item 6, subsection 100AA(6) of the ITAA 1936]
Exempt
entity’s ‘adjusted Division 6 percentage’ exceeds the benchmark percentage
2.186
The purpose of the second anti-avoidance rule
contained in section 100AB of the ITAA 1936 is to prevent an exempt
entity from receiving a disproportionate share of the trust’s taxable income,
relative to the exempt entity’s trust entitlements.
2.187
Broadly, if an exempt entity would
otherwise be assessed on a share of the taxable income of trust which exceeds
the exempt entity’s entitlement to the net accretions to the trust underlying
that taxable income (whether ‘income’ or ‘capital’ of the trust), that excess
is assessed to the trustee.
2.188
Section 100AB of the ITAA 1936 applies
even when an exempt entity that is the beneficiary of a trust is informed of,
or paid, its present entitlement to income of the trust estate. The section
applies subject to the operation of section 100AA of the ITAA 1936.
That is, it applies on the basis of a beneficiary’s present entitlement to income
as determined following the application of section 100AA of the
ITAA 1936. This ensures that an amount of present entitlement assessed to
a trustee under section 100AA of the ITAA 1936 is not assessed to the
trustee again under section 100AB of the ITAA 1936.
2.189
In determining whether an exempt entity would
otherwise be assessed on a disproportionate share of the trust’s taxable
income, the conditions in subsection 100AB(1) of the ITAA 1936 must
be satisfied. That is, there must be an exempt entity (excluding an exempt
Australian government agency) that is presently entitled to an amount of the
income of the trust estate; and that beneficiary’s adjusted Division 6
percentage of the income of the trust estate must exceed the benchmark
percentage calculated in accordance with subsection 100AB(3) of the
ITAA 1936. [Schedule 2, item 6, subsections 100AB(1) and (3)
of the ITAA 1936]
2.190
Where section 100AB of the
ITAA 1936 applies, the exempt beneficiary is treated as not being
presently entitled and never having been presently entitled to the amount of
the income of the trust estate that is attributable to the percentage by which
the exempt entity’s adjusted Division 6 percentage exceeds the benchmark
percentage. [Schedule 2, item 6, subsection 100AB(2)
of the ITAA 1936]
2.191
The trustee of the relevant trust is
then assessed and liable to pay tax under section 99A of the
ITAA 1936 on the taxable income of the trust estate that is attributable
to the percentage by which the exempt entity’s Division 6 percentage exceeds
the benchmark percentage.
Adjusted Division 6 percentage
2.192
As discussed in paragraphs 2.71 to 2.75 these
amendments insert a definition of a beneficiary’s adjusted Division 6 percentage into
subsection 95(1) of the ITAA 1936. It is the share of the income of
the trust estate to which the exempt entity is presently entitled for the
purposes of Division 6 excluding capital gains or franked distributions to
which any beneficiary or trustee is specifically entitled. [Schedule
2, item 2, subsection 95(1) of the ITAA 1936]
Benchmark
percentage
2.193
The benchmark percentage against which an exempt
entity’s adjusted Division 6 percentage is compared is calculated under
subsection 100AB(3) of the ITAA 1936. It is the percentage of the
‘adjusted net income’ of the trust estate to which the exempt entity is
presently entitled. [Schedule 2, item 6, subsection 100AB(3)
of the ITAA 1936]
2.194
The reference to amounts to which the exempt entity
is presently entitled is a reference to any amount to which the entity is presently
entitled to the extent that it forms part of the trust’s adjusted net income.
In this context, that may include an entitlement to income or capital. [Schedule 2, item 6, subsection 100AB(3)
of the ITAA 1936]
2.195
The ‘adjusted net income’ of a trust, is the
taxable income of the trust for that income year (as defined in
subsection 95(1) of the ITAA 1936) adjusted by the amounts set out in
subsection 100AB(4) of the ITAA 1936. It is necessary to adjust the
taxable income of the trust in this way to ensure that an entity’s benchmark
percentage can be properly compared to its adjusted Division 6 percentage.
[Schedule
2, items 3 and 6, subsections 95(1) and 100AB(4) of the
ITAA 1936]
2.196
Subsection 100AB(4) of the ITAA 1936
adjusts the taxable income of a trust in three ways.
•
First, paragraph 100AB(4)(a) reduces the
amount of the taxable income of the trust by amounts of any capital gain or
franked distribution to which a beneficiary or trustee is specifically entitled.
• Second,
paragraph 100AB(4)(b) increases the amount of the taxable income of the
trust by any discounts that have been claimed in relation any remaining capital
gain.
• Third,
paragraph 100AB(4)(c) then reduces the taxable income of the trust by any
amounts that do not represent net accretions of value to the trust estate in
that income year (other than amounts included in net income under Part IVA
of the ITAA 1936).
[Schedule 2, item 6, subsection 100AB(4)
of the ITAA 1936]
2.197
Amounts that do not represent ‘net accretions of
value to the trust estate’ are amounts that:
• have
not added to the trust estate during the relevant income year in terms of
monetary additions, property or additions of other value; or
• represent
an accretion coupled with a corresponding depletion (in cash or value) of the fund
(such as a loan that is coupled with a corresponding liability for the trustee
to repay that loan; or a receipt that is depleted by expenses properly
chargeable for trust purposes, but which are not allowable deductions for tax
purposes).
2.198
Examples of amounts that may be included in a
trust’s taxable income, but which do not represent net accretions of value to
the trust estate, include:
• the
amount of a franking credit included in the calculation of the trust’s taxable
income under subsection 207‑35(1);
• an
amount taken to be a dividend paid to the trustee of the trust pursuant to
subsection 109D(1) of the ITAA 1936 (loans treated as dividends under
Division 7A of Part III of the ITAA 1936);
• so
much of the net income of one trust (the first trust) that is included under
section 97 of the ITAA 1936 in the calculation of the net income of
another trust, but which does not represent a distribution of, or an
entitlement to income of the first trust;
• so
much of a net capital gain that is attributable to a reduction of what would
have otherwise been a relevant cost base or reduced cost base of a CGT asset as
a result of the market value substitution rule in section 112‑20; and
• so
much of a net capital gain that is attributable to an increase as a result of
the market value substitution rule in section 116‑30 of what would
otherwise have been a relevant amount of capital proceeds for a CGT event.
2.199
An amount included in the taxable income of a trust
as a result of the application of Part IVA of the ITAA 1936 is expressly
included in the trust’s adjusted net income, notwithstanding that it does not
represent a net accretion of value to the trust estate. Excluding such an
amount from the trust’s adjusted net income would effectively ‘unwind’ the work
done by Part IVA.
Example 2.33
In the 2010‑11 income year, the Bell Trust generated
$100,000 of rental income and $70,000 of franked distributions (with $30,000
franking credits attached). The trust had no expenses. The taxable income of
the trust is $200,000 (being the $100,000 rental income, $70,000 franked
distributions and $30,000 franking credits).
The trust deed does not define ‘income’ for the
purposes of the trust deed. However, there is a clause that allows the trustee
to treat receipts as income or capital of the trust at its discretion.
The trustee determines to exercise this power to treat
$95,000 of the rental receipts as capital and so the income of the trust estate
is $75,000.
Casey Pty Ltd, Mark and Emma are within the class of
discretionary objects. Casey Pty Ltd is an exempt entity.
The trustee specifically allocates all of the franked
distributions to Mark and appoints all of the remaining income of the trust
estate to Casey Pty Ltd ($5,000). The trustee notifies Casey Pty Ltd of its
entitlement by 31 August 2011. The trustee appoints all of the capital in
respect of that year to Emma ($95,000).
Casey Pty Ltd’s adjusted Division 6 percentage is
100 per cent (($75,000 − $70,000/$5,000) × 100) as it is presently
entitled to all of the income of the trust estate after disregarding the
$70,000 of franked distributions to which Mark is specifically entitled.
However, Casey Pty Ltd’s benchmark percentage is 5 per cent
(($5,000/$100,000) × 100). The franked distributions to which Mark is
specifically entitled and the attached franking credits (because they do not
represent net accretions of value to the trust fund) are excluded from the
adjusted net income for the purpose of calculating the benchmark percentage.
Casey Pty Ltd’s adjusted Division 6 percentage
exceeds the benchmark percentage by 95 per cent. The trustee of the Bell
Trust is therefore assessed and liable to pay tax on $95,000 (0.95 × $100,000)
under section 99A of the ITAA 1936.
Casey Pty Ltd’s share of the Bell Trust’s taxable
income is confined to Casey Pty Ltd’s entitlement of $5,000.
Example 2.34
In the 2010‑11 income year, the trustee of the Delta
Family Trust derives $90,000 interest. The trustee also receives a
distribution from a managed fund of $10,000, in respect of which it is required
to include $11,000 in its assessable income under section 97 of the
ITAA 1936.
The trust has no expenses. Its taxable income is
therefore $101,000. The trust deed does not define ‘income’. The income of
the trust estate is therefore $100,000 (comprising the $90,000 interest and
$10,000 trust distribution).
Notification
The trustee distributes $6,000 to an exempt
beneficiary (a church). As the exempt beneficiary is paid this amount within
two months after the end of the income year, section 100AA of the
ITAA 1936 does not apply.
Application of benchmark percentage
The adjusted net income of the Delta Family trust
excludes $1,000 of the $11,000 assessed to it under section 97 of the
ITAA 1936 in respect of the trust distribution, as only $10,000 of that
sum represents a net accretion to the trust. The adjusted net income of the
trust is therefore $100,000 and equal to the income of the trust estate.
Accordingly, the exempt entity’s adjusted
Division 6 percentage is 6 per cent ($6,000/$100,000 × 100).
The exempt entity’s benchmark percentage is also 6 per cent
($6,000/$100,000 × 100).
As the exempt entity’s adjusted Division 6
percentage equals the benchmark percentage, section 100AB of the
ITAA 1936 does not apply.
Commissioner’s
discretion
2.200
To avoid any unfair outcomes that might result from
the application of subsection 100AB(2) of the ITAA 1936, the
Commissioner has a discretion to not apply the subsection where he forms the
opinion that it is unreasonable for it to apply. [Schedule 2, item 6, subsection 100AB(5)
of the ITAA 1936]
2.201
In forming an opinion for the purposes of
subsection 100AB(5) of the ITAA 1936, the Commissioner must have
regard to the matters set out in subsection 100AB(6) of the
ITAA 1936, including:
• the
circumstances that led to the exempt entity’s entitlement being
disproportionate;
• the
extent to which the exempt entity’s entitlement was disproportionate;
• the
extent to which the exempt entity received distributions;
• the
extent to which other beneficiaries were entitled to benefit from amounts
included in the trust’s adjusted net income; and
• any
other matters the Commissioner considers relevant.
[Schedule 2, item 6, subsection 100AB(6)
of the ITAA 1936]
2.202
Where the Commissioner exercises the discretion
conferred under subsection 100AB(5) of the ITAA 1936, the exempt
entity is assessed in accordance with the ordinary operation of Division 6
(as then adjusted by Division 6E and Subdivisions 115‑C and 207‑B).
2.203
Subsection 100AB(7) of the ITAA 1936 applies
to ensure that where the application of section 99A is triggered, these
amendments apply in the same way for both non-resident and resident trust
estates. [Schedule 2, item 6, subsection 100AB(7)
of the ITAA 1936]
Application
and transitional provisions
2.204
The amendments made by this Schedule
apply in relation to the 2010‑11 income year and later income years. [Schedule 2, item 51,
subitem 51(1)]
2.205
However, applying the amendments may be optional
for early balancers and MITs.
Early
balancers
2.206
The amendments made by this Schedule only apply to a
trust that is an early balancer for the 2010‑11 income year where the trustee
of that trust makes a choice in accordance with subitem 51(4). The
trustee must make this choice in writing and before the end of two months after
the commencement of these amendments. [Schedule 2, item 51,
subitems 51(2) to (4)]
2.207
The Government has provided eligible taxpayers with
the ability to make this choice to ensure that they are not disadvantaged by
the introduction of these amendments after the end of the relevant trust’s 2010‑11
income year.
Example 2.35
The Robinson Trust has been granted leave by the
Commissioner to adopt a substituted accounting period that ends on
31 December 2010 in lieu of the income year ending on 30 June 2011.
The trust is therefore an early balancer for the 2010‑11 income year.
Before the end of 31 December 2010, the trustee
(acting in accordance with its powers under the trust deed) resolved to
distribute capital gains and franked distributions to specific beneficiaries.
To ensure the streaming of these amounts, the trustee
of the Robinson Trust makes a written choice on 1 August 2011 to apply
these amendments.
The Robinson Trust is therefore subject to the
application of the amendments made by this Schedule for its 2010‑11 income year
Managed
investment trusts
2.208
Further, the amendments made by this Schedule apply
to a trust that is a MIT (or a trust that is treated in the same way as a MIT
for the purposes of Division 275) for the 2010‑11 or 2011‑12 income years
where the trustee of the MIT chooses to apply these amendments. [Schedule
2, item 51, subitems 51(5) to (7)]
2.209
The choice is available for the 2010‑11 or the 2011‑12
income year. The trustee of the MIT must make this choice in writing and
before the end of two months after the later of the commencement of these
amendments and the end of the year in relation to which that choice is made. [Schedule 2, item 51,
subitem 51(7)]
2.210
However, if the trustee makes an effective choice
to apply these amendments for the 2010‑11 income year, the amendments also
apply for the 2011‑12 income year. That is, a trustee’s choice to apply the
amendments for the 2010‑11 income year is effectively irrevocable. This is
necessary to ensure that it is clear as to which version of the law applies to the
relevant trust.
2.211
The Government has included this choice for the
trustees of MITs (and certain trusts treated like MITs) in recognition that
these trusts generally do not ‘stream’ capital gains or franked distributions
and instead distribute all of their trust income proportionally. In addition,
this choice allows MITs to use the current ‘proportional approach’ in
Division 6 until the Government’s new MIT regime commences on 1 July
2012.
2.212
The exclusion of MITs (and trusts treated like
MITs) from the operation of the specific anti-avoidance rules in
section 100AA and section 100AB applies regardless of whether or not
a trustee chooses to apply these amendments.
Example 2.36
The Banfield Trust is treated in the same way as a MIT
for the purposes of Division 275 for the 2011‑12 income year. The trustee
of the Banfield Trust did not choose to apply the amendments contained in this
Schedule for the 2010‑11 income year.
However, on 1 July 2011 the trustee of the Banfield
Trust makes an election, in writing, to apply the amendments in this Schedule
for the 2011‑12 income year. The Banfield Trust is therefore subject to the
amendments contained in this Schedule for the 2011‑12 income year
Consequential
amendments
2.213
Consequential amendments are necessary to reflect
the changes to Subdivisions 115‑C and 207‑B. These Subdivisions now
effectively assess capital gains and franked distributions included in a
trust’s taxable income (rather than these amounts being assessed under Division
6).
2.214
Broadly, these consequential amendments ensure that
existing provisions in the tax laws that look to whether a taxpayer is assessed
on part of a trust’s taxable income take into account amounts assessed as a
result of Subdivisions 115‑C and 207‑B. Previously, these provisions
generally only referred to Division 6 concepts or assessable amounts.
2.215
The Government is aware that, because of complex
interactions in the current law, the general consequential amendments may not
operate as intended in all cases. However, the application of the general
rules to other provisions of the income tax laws is subject to a contrary
intention in the law.
2.216
The Government is committed to the introduction of
technical corrections on a regular basis to ensure that the tax legislation
works and interacts appropriately. Any further consequential amendments will
be considered as part of this regular maintenance process.
2.217
The consequential amendments take the form of two
general rules and a number of specific amendments.
General
consequential rules
2.218
The first general rule ensures that
existing provisions that refer to amounts included in a beneficiary’s
assessable income under section 97, 98A or 100 also include amounts
assessable to the beneficiary as a result of Subdivisions 115-C and 207-B. [Schedule 2,
item 1, section 95AAB of the ITAA 1936]
2.219
The second general rule ensures that
existing provisions that refer to amounts assessed to a trustee under section
98, 99 or 99A also include amounts assessable as a result of Subdivisions 115-C
and 207-B. [Schedule 2, item 1, section 95AAC of
the ITAA 1936]
2.220
These rules are intended to apply in respect of
references such as those in sections 102AAM and 160AAB of the ITAA 1936 and
section 165-60 of the ITAA 1997.
2.221
These rules do not apply to the
‘core’ provisions within Division 6, Subdivisions 115‑C and 207‑B — that
is, the provisions that effectively assess beneficiaries or the trustee on the
taxable income of a trust. In other words, the two general rules translate the
effect of the streaming amendments for provisions in the income tax laws that
refer to the core provisions, but do not affect the core provisions
themselves. [Schedule 2, item 1,
subsections 95AAB(3) and 95AAC(5) of the ITAA 1936]
Specific
amendments
2.222
The specific consequential amendments fall into two
broad categories:
• removing
or updating guide material and provisions that are no longer consistent with
the changed application of Division 6 and Subdivisions 115‑C and 207‑B;
and
•
amendments to provisions within Division 6 to
ensure that they interact appropriately with the two general consequential
rules.
[Schedule 2, items 20, 21 and 28 to
50]
Outline of
chapter
3.1
Schedule 3 to this Bill amends the Income Tax Assessment Act 1997 (ITAA
1997) to address technical issues which have arisen from the interaction
between the tax law and the National Rental
Affordability Scheme Act 2008 (NRAS Act).
3.2
All references are to the ITAA 1997 unless
otherwise stated.
3.3
These amendments also simplify the operation of the
National Rental Affordability Scheme (NRAS) for participants and provide some
additional flexibility to NRAS participants in how the incentive is shared
between members of consortiums participating in the NRAS.
3.4
Specifically, these amendments:
•
replace the references in the NRAS provisions of
the tax law to a non-entity joint venture with the broader concept of an NRAS
consortium;
•
recognise that the Secretary of the Department that
administers the NRAS (Housing Secretary) does not issue certificates under the
NRAS Act to consortiums participating collectively, but rather to an approved
participant (the entity that is complying with NRAS legislative requirements)
of an NRAS consortium;
•
introduce an optional election to allow approved
participants of NRAS consortiums to relinquish entitlements to a tax offset to
certain other parties of their consortium; and
•
extend the tax exemption already applying to state
and territory NRAS-related payments to include such payments which are received
indirectly by a taxpayer (for example, from another member of their NRAS
consortium).
Context of
amendments
Background
3.5
The NRAS is a Government initiative to stimulate
the supply of new affordable rental dwellings. The initiative
commenced on 1 July 2008.
3.6
Qualifying participants in the NRAS are eligible to
receive an annual NRAS incentive for up to 10 years for each approved dwelling
which is rented according to the requirements of the scheme.
3.7
These requirements include being rented to low or
moderate income households at 20 per cent below the market rate.
3.8
The NRAS incentive is $9,140 per dwelling in 2010‑11,
comprising $6,855 from the Australian Government and $2,285 from the States.
These amounts are indexed annually in line with the rents component of the
consumer price index.
3.9
The Australian Government component of the incentive
is delivered through a refundable tax offset, with endorsed charitable
institutions able to instead receive a cash payment.
3.10
Division 380 of the ITAA 1997 provides for the
NRAS tax offset.
Technical
issues to be addressed
3.11
Under the current legislation, taxpayers
collectively participating in the NRAS (other than through a partnership or
trust arrangement) must be operating through a non-entity joint venture. ‘Non‑entity
joint venture’ is defined by subsection 995-1(1) of the ITAA 1997. It
requires the Commissioner of Taxation (Commissioner) to be satisfied of the
presence of a contractual arrangement under which multiple parties undertake an
economic activity that is subject to a ‘control’ test.
3.12
The requirements attached to meeting the definition
of ‘non‑entity joint venture’ are restrictive to participants in the NRAS and
do not accommodate certain structures wanting to operate in the NRAS. This
will be addressed by these amendments.
3.13
Joint ventures between property developers,
property managers, and individual investors have so far proved a popular
vehicle for participating in the NRAS, enabling the pooling of their separate
resources to collectively meet the minimum dwellings requirement.
3.14
However, under such arrangements, joint ventures
may be legally structured in a way that results in the approved participant
(manager) deriving NRAS rent and the investor deriving ordinary rent (this
arrangement was highlighted in the Australian Taxation Office Interpretive
Decision (ATO ID) 2009/146). In these cases the manager, rather than the
ultimate investor, would be the entity entitled to the tax offset as the
manager is the entity deriving NRAS rent. This will be addressed by these
amendments.
Summary of
new law
3.15
Taxpayers are entitled to an NRAS tax offset, which
is a refundable tax offset, in the following circumstances.
•
An individual, corporate tax entity or a
superannuation fund is entitled to a refundable tax offset provided that the
Housing Secretary has issued the particular entity a certificate under the
NRAS. The amount of the tax offset is the amount stated in the certificate.
•
The partners of a partnership and the beneficiaries
of a trust are entitled to a refundable tax offset provided that the Housing
Secretary has issued their partnership or trust (or a partnership or trust
through which their interest is ultimately obtained) a certificate under the
NRAS. The amount of the tax offset is the amount stated in the certificate,
shared between the partners of a partnership or the beneficiaries of a trust
according to their proportion of the NRAS rent of the partnership or trust for
the NRAS year.
•
A trustee of a trust (rather than the trust’s
beneficiaries) is entitled to a refundable tax offset provided that the Housing
Secretary has issued the trustee a certificate under the NRAS and the trust has
no net income. Similarly, a trustee of a trust (rather than the trust’s
beneficiaries) is entitled to a refundable tax offset if the NRAS refundable
tax offset flows to this trust from another entity (because the trust is a
party to a non-entity joint venture, the trust is a partner of a partnership,
or the trust is a beneficiary of another trust which has net income) and the
trust to which the offset flows has no net income. Trustees assessable on net
income of the trust are also entitled to a share of the offset.
3.16
In addition to the above circumstances, groups of
taxpayers collectively participating in the NRAS (via an NRAS consortium) may
each become entitled to an NRAS tax offset.
3.17
A party to an NRAS consortium is entitled to an
NRAS tax offset provided that the Housing Secretary has issued the approved
participant of the consortium a certificate under the NRAS and the entity has
been deriving NRAS rent.
3.18
The amount of the tax offset is the amount represented
by the certificate shared between the members of the NRAS consortium according
to their proportion of the NRAS rent from the NRAS dwelling for the NRAS year.
3.19
State and territory NRAS-related payments are
non-assessable non-exempt income, whether received by a taxpayer directly or
indirectly (for example, from another member of their NRAS consortium).
Comparison of key features
of new law and current law
|
|
|
|
Groups of taxpayers collectively participating in
the NRAS need not establish a non-entity joint venture to enable each
taxpayer to become entitled to an NRAS tax offset. The replacement concept
of an NRAS consortium is a broader one than non‑entity joint venture.
Contractual arrangements establishing an NRAS consortium need only to
facilitate the leasing of approved rental dwellings under the NRAS. There is
no requirement that the economic activity be subject to the joint control of
the parties.
|
Groups of taxpayers collectively participating in the
NRAS and wishing to each become entitled to an NRAS tax offset must establish
a non-entity joint venture for this purpose.
This requires, inter
alia, the presence of a contractual arrangement under which
multiple parties undertake an economic activity that is subject to the joint
control of the parties.
|
|
The NRAS consortium pathway applies where the
Housing Secretary has issued the approved participant, on behalf of the NRAS
consortium, with a certificate under the NRAS Act in relation to the rental
dwelling.
|
The non-entity joint venture pathway in the tax law
depends on the Housing Secretary having issued the non-entity joint venture
with a certificate under the NRAS Act in relation to the rental dwelling.
|
|
Approved
participants (managers) of NRAS consortiums, where they are deriving NRAS
rent, may elect to relinquish an entitlement to an NRAS tax offset to other
members of their NRAS consortium.
|
The entity
directly deriving the NRAS rent is entitled to the NRAS tax offset.
|
|
Payments
(and non-cash benefits) made by state and territory governments in relation
to participation in the NRAS are non‑assessable non‑exempt income.
This applies
whether this payment is received by the taxpayer directly or indirectly, such
as through an NRAS consortium of which they are a member.
|
Payments by
a state or territory government, in relation to participation in the NRAS,
received indirectly by a taxpayer are treated as income in the hands of the
taxpayer.
|
Detailed
explanation of new law
3.20
When the National Rental Affordability Scheme Bill
2008 was introduced, the Government stated in Parliament that they expected the
scheme would facilitate new and creative partnerships between institutional
investors, developers and community housing providers.
NRAS
consortiums
3.21
The definition of an ‘NRAS consortium’ recognises
the existence of the new arrangements established for groups of taxpayers to participate
collectively in the NRAS.
3.22
An NRAS consortium
is defined as a consortium, joint venture or non-entity joint venture
established by one or more contractual arrangements that facilitate the leasing
of NRAS dwellings. [Schedule 3, item 17, subsection
995-1(1)]
3.23
An NRAS dwelling means an approved rental dwelling for the
purposes of the regulations made under the NRAS Act. [Schedule
3, item 18, subsection 995‑1(1)]
3.24
As the definition of ‘NRAS
consortium’ includes non-entity joint ventures, the ongoing operation of
section 380-10 of the ITAA 1997 for parties to existing non-entity joint
ventures is assured.
3.25
In practice, many contractual
arrangements may exist between different parties involved in various stages in
preparing dwellings to be leased under the NRAS. The NRAS consortium
definition recognises that multiple contractual arrangements may exist.
3.26
The contractual arrangements must
facilitate the leasing of approved rental dwellings under the NRAS, however,
the contractual arrangements may also deal with other things.
3.27
A corporate tax entity,
superannuation fund, trust or partnership cannot be an NRAS consortium.
However, they may be a member
of an NRAS consortium. [Schedule 3, item 17, subsection 995-1(1)]
Members
of an NRAS consortium
3.28
A member of an NRAS consortium is
an entity that is a party to a contractual arrangement, or to one of the
contractual arrangements, that established the NRAS consortium. A member of an
NRAS consortium may not necessarily have been a party to the contractual arrangement
at the time the NRAS consortium was established. [Schedule
3, item 14, subsection 995‑1(1)]
3.29
In practice, individual entities
will enter into an individual contractual arrangement with the approved
participant in regard to the rental dwellings to be rented under the NRAS.
3.30
A partnership may also be a member of a consortium
if all the partners of the partnership are parties to a contractual arrangement
that established the consortium. [Schedule 3, item 14, subsection 995-1(1)]
3.31
The member of an NRAS consortium
who is the approved participant represents the consortium when interacting with
the Department of Sustainability, Environment, Water, Population and Community
(DSEWPaC). [Schedule3, item 15, subsection 995‑1(1)]
Example
3.1: NRAS consortium
Affordable Rental Housing Group is a consortium
comprising a manager (Affordable Rental Solutions Company) and 200 individual
dwelling owners.
Affordable Rental Solutions Company applies to the
Housing Secretary to participate in the NRAS and effectively represents the
parties to the consortium. It is the ‘approved participant’.
The Affordable Rental Housing Group is a consortium
established by contractual arrangements that facilitates the leasing of
approved rental dwellings under the NRAS. It is an NRAS consortium.
Example
3.2: NRAS consortium
ABC Group is a consortium comprising an approved
participant (Holding Pty Ltd), a tenancy manager (Real Estate Pty Ltd) and the
owner of a rental dwelling.
There is a contractual agreement between Holding Pty
Ltd and the owner of the rental dwelling, another contractual agreement between
the owner of the rental dwelling and the tenancy manager and another between
the tenancy manager and Holding Pty Ltd. All contractual agreements are to
facilitate the leasing of approved rental dwelling under the NRAS.
ABC Group is an NRAS consortium.
Holding Pty Ltd, being the approved participant, represents
the members of the consortium via interactions with the DSWEPaC.
Members of
the NRAS consortiums are entitled to tax offsets
3.32
Members of an NRAS consortium are entitled to a tax
offset for an income year if:
•
a certificate has been issued to the approved
participant in relation to the NRAS dwelling;
•
the income year begins in the NRAS year to which
the certificate relates;
•
the member is an individual, a corporate tax entity
or a superannuation fund; and
•
the member has derived NRAS rent from an NRAS
dwelling covered by the certificate during the NRAS year.
[Schedule 3, item 1,
subsections 380-10(1) and (2)]
3.33
Section 380-10 of the ITAA 1997
deals with claims by a member of an NRAS consortium that is an individual,
corporate tax entity or a superannuation fund. It is the mechanism by which
groups of taxpayers collectively participating in the NRAS each become entitled
to an NRAS tax offset.
3.34
As mentioned above, NRAS
consortiums may be legally structured in many ways. In some cases investors
may be deriving NRAS rent directly, while in other cases, where there is the
presence of a head lease (between the investor and the manager) and sublease
(between the manager and the eligible tenant), the manager of the rental
dwellings will be the entity deriving NRAS rent and the investor will be
deriving ordinary rent from the manager.
3.35
One element that needs to be
satisfied for a member to be entitled to the NRAS tax offset under section
380-10 is that the member has derived NRAS rent. NRAS rent is defined as rent derived
from a rental dwelling under the NRAS for an income year. [Schedule
3, item 19, subsection 995‑1(1)]
Example
3.3: NRAS rent derived by the approved participant
Affordable Rental Housing Group is an NRAS consortium
comprising a manager (Affordable Rental Solutions Company) and 200 individual
dwelling owners.
Under this
NRAS consortium, the individual dwelling owners enter into head leases with the
Affordable Rental Solutions Company and then the company enters into subleases
with the eligible tenants. (This arrangement is the same as the arrangement
outlined in ATO ID 2009/146.)
As outlined in ATO ID 2009/146, in this situation the
manager, Affordable Rental Solutions Company, is deriving NRAS rent and the
individual dwelling owner is deriving ordinary rent. As such, the manager
would be the entity eligible for the NRAS tax offset.
See paragraphs 3.52 to 3.75 on the election available for
the manager to pass the incentive on to the dwelling owner.
Example
3.4: NRAS rent derived by the owner of the rental
dwelling
ABC Group is an NRAS consortium comprising an approved
participant (Holding Pty Ltd), a tenancy manager (Real Estate Pty Ltd) and the
owner of a rental dwelling (DFJ Pty Ltd).
Under this NRAS consortium, the tenancy manager has
the responsibility of managing the rental property and the approved participant
has the responsibility of engaging with the DSEWPaC in regard to the NRAS
obligations. Rent from the NRAS dwelling is paid through the tenancy manager
directly to the owner of the rental dwelling and is considered to be NRAS rent
paid to the owner.
As DFJ Pty Ltd has derived NRAS rent, it will be
eligible to a tax offset for an income year if a certificate has been issued to
the approved participant in relation to the NRAS dwelling and the income year begins
in the NRAS year to which the certificate relates.
Certificates
issued by the Housing Secretary
3.36
The approved participant will have notified the DSEWPaC
of its role as representative of an NRAS consortium. In practice, the Housing
Secretary will issue an NRAS certificate to the approved participant (which may
be the manager) of an NRAS consortium. [Schedule 3, item 16, subsection 995-1(1)]
3.37
Certificates are issued to the approved participant
regardless of whether the approved participant is the entity directly deriving
NRAS rent.
3.38
A certificate issued under the NRAS in relation to
the NRAS dwelling is a requirement that needs to be satisfied for a
consortium member to be entitled to the NRAS tax offset under section 380-10.
However, the certificate is not required to be issued to the same entity
claiming the NRAS tax offset under section 380‑10, it is simply required to be
issued.
Amount
of the tax offset
3.39
Members of an NRAS consortium are entitled to the
portion of the total amount of the tax offset stated for each NRAS dwelling
(stated in the certificate issued to the approved participant of the NRAS
consortium), which is equal to their portion of the total NRAS rent derived
from the NRAS dwelling during the NRAS year. [Schedule 3, item 1, subsection 380‑10(2)]
3.40
In cases where only one member derives NRAS rent
for an NRAS dwelling, that member will be entitled to the full amount stated in
the certificate for that NRAS dwelling. Likewise, in cases where there are two
members who have been deriving the NRAS rent in the ratio 30:70, the member
deriving 30 per cent of the NRAS rent will be entitled to 30 per cent of
the incentive stated in the certificate for the NRAS dwelling and the member
deriving 70 per cent of the NRAS rent will be entitled to 70 per cent of the
incentive stated in the certificate.
3.41
If the Housing Secretary issues an amended
certificate, references to an NRAS certificate will be treated as a reference
to an amended NRAS certificate. In practice, this will mean that once an
amended certificate is issued it takes the place of the original certificate. [Schedule
3, item 2, section 380‑32]
Example
3.5: Calculating the amount of the tax offset
HP is a member of an NRAS consortium who is entitled
to an NRAS tax offset. HP derives $12,000 of NRAS rent from the NRAS dwelling
for the 2010-11 NRAS year. $12,000 is the total amount of NRAS rent derived
from the NRAS dwelling for the 2010‑11 NRAS year and therefore HP is the only
entity deriving NRAS rent from the NRAS dwelling in the 2010‑11 NRAS year.
The certificate issued in relation to the NRAS
dwelling indicates an incentive of $6,000 for the NRAS dwelling for the 2010-11
NRAS year.
HP will be entitled to a tax offset of $6,000 (6,000 × (12,000/12,000)).
3.42
In cases where the NRAS certificate represents only
part of the NRAS year and as such the incentive amount in the certificate has
been apportioned for that period, members must work out their entitlement based
on that period to which the certificate relates. [Schedule 3, item 1, subsection 380‑10(3)]
3.43
Under the NRAS, approved participants that are
endorsed charitable institutions will receive the NRAS incentive as a payment
unless they elect to receive the incentive as a tax offset. Certificates are
only issued for the purposes of the tax offset.
3.44
In certain situations where the approved
participant has changed their status throughout the NRAS year (for example,
from an endorsed charitable institution to another eligible approved
participant), the Housing Secretary may make a payment for NRAS dwellings in
relation to part of the NRAS year and also issue a certificate for the NRAS
dwellings in relation to the other part of the NRAS year. (The provisions that
determine the situation where this may occur are outlined in Regulation 29
of the National Rental Affordability Scheme
Regulations 2008.)
3.45
In cases where a certificate is issued, in addition
to a direct payment for the NRAS dwelling being made by the DSEWPaC, members must
work out their entitlement to the tax offset amount listed in the certificate
with reference to the time period covered by the certificate.
Example
3.6: Calculating the amount of the tax offset — certificate
covering part of the NRAS year
HP is a member, but not
the approved participant, of an NRAS consortium who is entitled to an NRAS tax
offset. HP derives $12,000 of NRAS rent from the NRAS dwelling for the 2010-11
NRAS year. $12,000 is the total amount of NRAS rent derived from the NRAS dwelling
for the 2010‑11 NRAS year and therefore HP is the only entity deriving NRAS
rent from the NRAS dwelling in the 2010‑11 NRAS year.
During the NRAS year the
approved participant changes and as a result a direct payment and an NRAS
certificate is issued in relation to the NRAS dwelling. The certificate issued
in relation to the NRAS dwelling indicates an incentive of $2,000 for the NRAS
dwelling (the certificate covers four months of the year). An additional
$4,000 is paid directly to the approved participant.
The amount of NRAS rent
derived by HP over the four-month period to which the certificate relates
equals $4,000.
HP will be entitled to a
tax offset of $2,000 (2,000 × (4,000/4,000)) and will receive the
$4,000 incentive paid directly to the approved participant.
Regardless of whether the
approved participant changes throughout the NRAS year, HP will be entitled to
the full incentive related to the NRAS dwelling. This is because HP is the
only entity deriving NRAS rent from the NRAS dwelling for the full NRAS year.
Special
rules for partnerships and trustees that are members but not the approved
participant
3.46
If the member of the NRAS consortium is a
partnership or a trustee of a trust (and the member is not the approved
participant) and the following conditions are satisfied:
•
a certificate has been issued in relation to an
NRAS year to the approved participant;
•
the NRAS certificate covers one or more NRAS
dwellings; and
•
the member has derived NRAS rent during the NRAS
year from any of the NRAS dwellings,
then it must be assumed for sections 380‑15 and 380‑20
of the ITAA 1997 that the member (rather than the approved participant) has
been issued with a certificate in relation to the NRAS year that covers the
dwellings for which the member has NRAS rent. The amount stated in the certificate
is the total amount that the member is eligible to receive in relation to the
dwellings. [Schedule 3, item 1, section 380‑14]
3.47
NRAS rent may flow indirectly to entities via a
partnership or a trust. Entities that receive the NRAS rent indirectly are
entitled to an offset if certain conditions are satisfied.
3.48
An entity is entitled to a tax offset for an income
year (offset year) if:
•
a certificate has been issued in relation to an
NRAS year to the partnership or trustee of the trust;
•
the NRAS certificate covers one or more NRAS
dwellings;
•
the offset year for the partnership or trustee
begins in the NRAS year;
•
NRAS rent derived from any of the NRAS dwellings
during the NRAS year flows indirectly to the entity in any income year; and
•
the entity is one of the following: an individual;
a corporate tax entity when the NRAS rent flows indirectly to it; the trustee
of a trust that is liable to be assessed on a share of, or all or a part of,
the trust’s net income under the Income Tax
Assessment Act 1936; the trustee of an First Home Savers Account; a
superannuation fund; an approved deposit fund; or a pooled superannuation
trust.
[Schedule 3, item
1, subsection 380‑15]
Amount
of the tax offset
3.49
The entity to which the NRAS rent flows indirectly
via a partnership or a trust is entitled to a tax offset equal to the portion
of the total amount stated for each NRAS dwelling in the certificate which is
equal to the portion of the entity’s share of total NRAS rent for the NRAS
dwelling during the NRAS year. [Schedule 3, item 1, subsection 380‑15(2)]
3.50
In cases where the NRAS certificate represents only
part of the NRAS year and as such the incentive amount in the certificate has
been apportioned for that period, entities will also work out their entitlement
based on that period to which the certificate relates. [Schedule
3, item 1, subsection 380‑15(3)]
3.51
Minor amendments have been made to ensure the
structure of provisions is consistent. [Schedule 3, item 1, sections 380‑5
and 380‑20]
Election to
allow investors not deriving NRAS rent to receive the tax offset
Approved
participants who are individuals, corporate tax entities or a superannuation
fund
3.52
Given that the eligibility to the tax offset is
triggered by deriving NRAS rent, this election provides the approved
participant deriving NRAS rent with a mechanism to transfer the tax offset to
the ultimate investor where the structures adopted result in the investor
deriving rent that cannot be characterised as NRAS rent.
3.53
As discussed in paragraph 3.34, NRAS consortiums
may be structured in many ways. In the case where a head lease (between the
investor and the manager) and a sublease (between the manager and the eligible
tenant) exists, the manager of the rental dwellings will be the entity deriving
NRAS rent and will therefore be entitled to the tax offset.
3.54
In these cases, the NRAS approved participant of an
NRAS consortium may make an irrevocable election to ensure that a member of the
NRAS consortium is entitled to a portion of the tax offset that the NRAS
approved participant would otherwise be entitled equal to the member’s rent
portion of the total rent. [Schedule 3, item 4, subsections 380‑11(1)
and (4) and 380-12(1) and (2)]
3.55
The member’s rent would be the rent derived by the member
(indirectly) from the NRAS dwelling during the income year and the total rent
would be the rent derived from the NRAS dwelling during the NRAS year. [Schedule
3, item 4, section 380-12]
3.56
In practice, the member may have an agreed practice
with the approved participant where the approved participant takes fees out of
the NRAS rent it derives before passing on the ordinary rent to the member.
3.57
The definition of ‘members rent’ is the rent
derived by the member from the NRAS dwelling and as such will consist of the
actual amount passed on to the member plus any amounts taken out by the
approved participant by virtue of any additional agreements between the
parties, if that amount taken out would be included in the assessable income of
the member.
3.58
If the NRAS dwelling was only
eligible for the NRAS offset for part of the income year, then the member’s
rent or total rent relates to that part of the year that the NRAS dwelling was
eligible to receive the NRAS offset. [Schedule 3, item 4, subsection
380-12(4)]
3.59
In essence, the election will pass
the entitlement from the approved participant on to the member deriving the
ordinary rent indirectly from the NRAS dwelling. As such, the approved
participant’s tax offset entitlement under the standard provisions (section 380‑10)
will be reduced by the same amount as the amount passed on to the member via
the election. [Schedule
3, item 4, subsection 380-12(3)]
3.60
Disregard from total rent any rent derived by an
approved participant which is then passed on to another member by virtue of
contractual arrangements that establish the NRAS consortium. [Schedule 3,
item 4, subsection 380‑12(5)]
3.61
Any NRAS rent retained by the
approved participant as management fees or commission will be treated as being
passed on to the other member. [Schedule 3, item 4, subsection 380‑12(6)]
3.62
Amendments ensure that the election
links into the flow-through provisions which apply when the tax offset is
‘transferred’ to a trustee or partnership. [Schedule
3, item 4, section 380-13]
Approved
participants who are partnerships or trustees
3.63
Approved participants who are partnerships and
trustees of trusts can also make an irrevocable election to have an entitlement
to a tax offset (by virtue of NRAS rent derived by the approved participant
flowing indirectly to an entity in an income year) transferred to another
member deriving rent from the NRAS dwelling during the NRAS year.
[Schedule 3, item 6, section 380‑16]
3.64
If the entity to which the entitlement to the tax
offset is transferred is an individual, a corporate tax entity or a
superannuation fund, then the amount of the tax offset to which the entity is
entitled will be the portion of the total tax offsets equal to the member’s
rent portion of total rent. [Schedule 3, item 6, section 380‑17]
3.65
Member’s rent and total rent have the same meaning
as in paragraph 3.55. [Schedule 3, item 6, subsection 380‑17(2)]
3.66
Again, disregard from the total rent any rent
derived by an approved participant which is then passed on to another member by
virtue of a contractual arrangement that established the NRAS consortium. [Schedule 3,
item 6, subsection 380‑16(5)]
3.67
Any NRAS rent retained by the approved participant
as management fees or commission will be treated as being passed on to the
other member. [Schedule 3, item 6, subsection 380‑16(6)]
3.68
Total tax offset means the total of offsets to which
entities would be entitled because the NRAS rent derived from the NRAS dwelling
covered by the certificate flows indirectly to them from the approved
participant. [Schedule 3, item 6, subsection 380‑16(2)]
3.69
The tax offset to which an entity to which NRAS
rent derived from the NRAS dwelling flows indirectly is reduced because of the
election. The offset is reduced by the proportion of the tax offset
entitlement transferred that equals the proportion of the entities original tax
offset to the total tax offsets. [Schedule 3, item 6, subsection 380‑16(2)]
3.70
These amendments ensure that the election by a
partnership or trustee approved participant links into the flow-through
provisions in sections 380‑15 and 380‑20 to 380‑30 where the tax offset is
‘transferred’ to a another trustee or partnership. [Schedule 3,
item 6, section 380‑18]
Requirements
for elections
3.71
The election must be made in the approved form and
within 30 days after the day the Housing Secretary issues the certificate
to the NRAS approved participant. [Schedule 3, item 4, subsections
380-11(2) and 380‑16(2)]
3.72
If an amended certificate is issued by the Housing
Secretary, the election will be required to be made within 30 days after the
amended certificate is issued. [Schedule 3, item 2, section 380-32]
3.73
The Commissioner may require that a copy of the
election be given to the Commissioner and/or to each member of the NRAS
consortium who may be entitled to a tax offset as a result of the election
being made. [Schedule 3, item 4, subsections 380-11(3) and
380-16(3)]
3.74
Allowing the Commissioner to require that a copy of
the election be given to members aids in the administration of the NRAS and
will provide notification/assistance to those members entitled to the NRAS
offset by virtue of the election being made.
3.75
The Commissioner may choose not to
require a copy of the election to be provided and may instead require that
approved participants simply make an election and retain that election until an
audit is performed when the election will need to be evidenced.
Example 3.7
An NRAS consortium is established that includes the
dwelling owners and the manager of the consortium. The approved participant of
the consortium is the manager. The manager applies to the Housing Secretary to
participate in the NRAS and represents the parties to the consortium.
The dwelling owners enter into a head lease with the
manager of the consortium. The manager of the consortium then enters into a
sublease with NRAS eligible tenants (being low to moderate income households).
Under this arrangement, it is the manager (approved
participant) of the NRAS consortium that derives NRAS rent from the eligible
tenants under the sublease. The dwelling owners derive ordinary rent (not NRAS
rent) from the manager under the head lease.
These facts are identical to those addressed by ATO ID
2009/146 (with the references to ‘non-entity joint venture’ replaced by ‘NRAS
consortium’).
Following the completion of the NRAS year, the Housing
Secretary issues the manager representing the consortium with a certificate in
relation to the rental dwelling.
If an election is not made, the manager would be
entitled to a tax offset, as the manager is the entity deriving NRAS rent. The
dwelling owners, having not derived any NRAS rent, would not be entitled to a
tax offset. This is not NRAS rent for the reasons given in ATO ID 2009/146.
Alternatively, the parties to the consortium may have
predicated their participation in the NRAS on the basis that the NRAS incentive
would be enjoyed by the dwelling owners, rather than the manager. To achieve
this outcome, following receipt of the certificate from the Housing Secretary,
the manager may elect to relinquish its entitlement to a tax offset for the
income year corresponding to the NRAS year covered by the certificate. The manager
is eligible to make this election because it is entitled to a tax offset under
section 380-10 of the ITAA 1997 and it is the approved participant in relation
to the NRAS consortium.
If the manager makes the election, each party’s
entitlement to the NRAS tax offset for a dwelling would be in proportion to
their share of the ordinary rent derived in relation to that dwelling, for the
time in the NRAS year covered by the certificate in which the dwelling was
eligible for the NRAS incentive. In this example, the ordinary rent derived
from a rental dwelling means the rent derived by a dwelling owner under the
head lease (that is, the rent derived by the dwelling owner from the manager of
the consortium). Although this is not NRAS rent, it is rent ultimately sourced
from the NRAS rent derived by the manager.
In this example, the dwelling owners are the ultimate
recipients of all of the rent in respect of the property, under the head
lease. Each dwelling owner therefore would be entitled to a portion of the tax
offset but only if the election is made. The manager, having made the
election, and not being the ultimate recipient of any rent in respect of the
dwelling, is no longer entitled to any tax offset.
Payments made
by states and territories
3.76
NRAS-related payments made (and non-cash benefits
provided) by a state or territory government are non-assessable non‑exempt
income. [Schedule 3, item 10, section 380-35]
3.77
This is the case whether such payments are received
by a taxpayer directly or indirectly (for example, from another member of their
NRAS consortium). [Schedule 3, item 10, section 380-35]
3.78
Likewise, a capital gain or capital loss made from
a CGT event relating directly to anything of economic value provided directly
or indirectly by a state or territory government in relation to the
participation in the NRAS is disregarded. [Schedule 3, item 9, paragraph
118-37(1)(j)]
Example 3.8:
Treatment of a state government NRAS-related payment received indirectly by the
taxpayer
Mr Smith is part of the XYZ Housing Group, an NRAS
consortium providing 400 rental dwellings under the NRAS across
South Australia. Mr Smith owns one of these dwellings.
The South Australian Government elects to make its
contribution to the NRAS incentive through a cash payment. In the case of NRAS
consortiums, the South Australian Government makes a single cash payment to the
approved participant of the consortium, in respect of all of the dwellings
operated by the consortium which are eligible for an NRAS incentive.
In 2010-11, all of XYZ Housing Group’s dwellings are
eligible for the full NRAS incentive. Accordingly, the South Australian
Government makes a payment in May 2011 to the approved participant of XYZ
Housing Group of $914,000 (that is, $2,285 × 400).
This amount is non-assessable non-exempt income in the
hands of the approved participant of XYZ Housing Group.
The practice of XYZ Housing Group is to have the
economic benefit of the NRAS incentive flow to the individual dwelling owners.
Accordingly, in May 2011 the manager makes a payment of $2,285 to Mr Smith.
This amount is an NRAS-related payment made by a state
government which is received indirectly by Mr Smith. Therefore, it is non‑assessable,
non-exempt income.
Application
and transitional provisions
3.79
Item 10, which amends the treatment
of state and territory payments, applies to the 2008-09 income year and later
income years. [Schedule 3, item 11]
3.80
The following items will apply
retrospectively for the benefit of affected taxpayers.
3.81
Item 1, which introduces the concept of an NRAS
consortium and recognises that certificates are issued to the approved
participant of the consortiums rather than to the consortiums directly, applies
to the 2009-10 income year and later income years. [Schedule
3, item 3]
3.82
Items 4 and 6, which provide an optional election
for certain taxpayers, applies to the 2010-11 income year and later income
years. [Schedule 3, item 7]
3.83
An election in relation to an NRAS certificate may
be made within 30 days after the day the amendment receives Royal Assent, if
the Housing Secretary has already issued the NRAS certificate for the NRAS year
2010-11 before that date. [Schedule 3, item 8]
Consequential
amendments
3.84
There are consequential amendments made as a
consequence of the technical amendments. The consequential amendments also
clarify the meaning of the terms connected to the NRAS. [Schedule
3, items 5, 12, 13 and 15]