Choosing Which Main Residence to Cover When Children are Living in Your Old Home

Question

Capital Gain in a Trust with revenue losses. Trust has only one beneficiary.

Trust has revenue loss for the year of $29,788 with a Gross Capital Gain of $200,000 on the sale of the Business.
Therefore accounting distribution is $170212.
Tax return has a Capital Gain (Net after discount and active asset reduction) of $50,000 and the revenue loss of $29,788 resulting in Taxable Income of $20,212.

This $20,212 would then be distributed to the beneficiary’s Income Tax Return showing a loss at Item 13 ($29,788) and a net Capital Gain of $50,000. (Beneficiary has no Capital losses).

Question 1: Is this correct?
Question 2: I have read an example where a $1,000,000 Capital Gain was offset by a $500,000 revenue loss. The $500,000 is paid to a beneficiary.

The example states that:
the Capital Gain still totals $1,000,000 because CGT law does not recognise the revenue loss
as applying to Capital Gains. Because the distribution to beneficiary is half the capital gain, beneficiary counts as being specifically entitled to only $250,000 – that is, half of the distributed amount. Beneficiary is liable to income tax on $250,000 at his marginal rate. However the trust will be liable to income tax on $250,000 as well, at a punitive rate of 45%. This is because the balance of the distribution counts as “income to which no beneficiary is specifically entitled”.

Question 3: depending on the answer to the above would it be better (or possible) to distribute the Capital Gain only and retain the Revenue Loss to carry forward.? If so how would this be reflected in the Income Tax Return of the Trust and Individual?

Answer

You are lucky there is just one beneficiary.

The CGT concessions flow through to the beneficiary. That is the capital gain is grossed back up again and distributed but the beneficiary is entitled to the same CGT concessions that the trust was entitled to.

Yes 1) is correct re item 13 and net capital gain it is just the total capital gain that will be grossed right back up.

Yes the revenue loss only comes into play against the capital gain when calculating the over all taxable income and a trust revenue loss can only be distributed if the trust actually has an accounting profit to distribute.

I don’t know where you found that example but if it were true it makes a mockery of the conduit theory for capital gains distributed by a trust. Is it possible that the example is referring to a corporate or foreign beneficiary? Or possibly the problem is that the beneficiary in that example actually only received half the capital gain, therefore, the remaining capital gain has to be taxed in the hands of the trust as no one received it. Just like anytime a trust only distributes half its profits. It says $500,000 was paid to the beneficiary. It may mean only $500,000 was distributed to the beneficiary. I think this might be what your example is saying. It does make the example correct. But not applicable to your circumstances if the beneficiary is entitled to 100% of the trust’s income and capital gains. What you need to consider is presently entitled not how much cash they walk away with. If the beneficiary is entitled to 100% of the profit and capital gains then it is all transferred to their tax return. If instead the profit distribution minute simply said (to use the example) we resolve to distribute $500,000 to x then that is all X receives which is half the taxable profit leaving the other half sitting in the trust to be taxed there. It would be a very strange trust distribution minute that set and exact amount without a default beneficiary for the balance. The profit distribution needs to just say 100% of the profit gains etc. This then becomes 100% of accounting profit, 100% of taxable income, 100% of the capital gain whatever. That is the good thing about 1 beneficiary.

Further, it would not generally be the case that no beneficiary is presently entitled to the capital gain of the trust unless specifically stated. If the distribution of the capital gain is not addressed in the distribution minute then it is just apportioned prorate on the same basis as the other trust income.

Question 3 – the idea is to just say 100% of everything to x. In your tax software, it should do the transfer for you so you will have more confidence seeing that.

This example from the ATO web site https://www.ato.gov.au/Forms/Guide-to-capital-gains-tax-2019/?page=29 might make you feel more confident about ignoring the example you refer to:

Example 17: Distribution where the trust claimed concessions

Serge is the sole beneficiary in the Shadows Unit Trust. His statement of distribution or advice from the trust shows that his 100% share of the net income of the Shadows Unit Trust for income tax purposes was $2,000. The $2,000 includes a net capital gain of $250 (made of a $1,000 capital gain that was reduced by the CGT discount and the small business 50% active asset reduction).

His statement advises him that he has a 100% share of the capital gain which is $1,000.

Because he has a 100% share of the capital gain, Serge will have an ‘attributable gain’ of $250 (that is, the whole of the net income of the trust estate for tax purposes that relates to the gain).

Due to the application of the CGT discount and the small business 50% active asset reduction, Serge then grosses up his ‘attributable gain’ of $250 by multiplying it by 4 to $1,000 which is his extra capital gain.

Serge has also made a capital loss of $100 from the sale of shares.

He calculates his own net capital gain as follows:

Serge will write $1,000 at H item 18 on his tax return (supplementary section), which is his total current year capital gain. The net capital gain he will write at A item 18 on his tax return (supplementary section) is $225. He will write a trust distribution of $1,750 ($2,000 − $250) at U item 13 on his tax return (supplementary section).