Guide on Trust Funds – Part 17

What rules apply when a trustee streams capital gains?

Where a trust derives a capital gain, the amendments made by Bill 5 now ensure that the capital gain can be ‘streamed’ to one or more beneficiaries. The importance of this is that the trustee can direct the capital gain to those beneficiaries that can have capital losses and/or who can benefit in relation to the 50% discount.

The new ‘streaming’ provisions are contained in Subdivision 115-C of the ITAA 1997

In order for a trustee to effectively ‘stream’ a capital gain there are a number of rules that must be complied with, as follows:

• The trust deed must allow for streaming – refer to earlier discussion;
• the capital gain must be distributed in its character as a capital gain;
• The resolution must specifically refer to the amount/proportion of the income that is being distributed as a capital gain
• The distribution purporting to stream the capital gain must be in writing no later than the 31 August after the financial year end 30 June.
• The capital gain is taken to be streamed to a beneficiary to the extent they are entitled to the ‘net financial benefit’ attributable to the capital gain, which is the ‘gross’ capital gain less any capital losses
• It is only necessary to stream the amount of the gross capital reduced for any capital losses. This rule only applies where the capital loss is offset in the same way for tax purposes;
• A beneficiary can be streamed a capital gain as income or capital or a combination of both;
• If the beneficiaries are not made entitled to the entire gross capital gain, a portion of the net (taxable capital gain will be assessed to the other income beneficiaries of the trust;
• If the capital gain is calculated under the market value substitution rule, all of part of the capital gain will not be capable of being streamed
• If the net (taxable) capital gain exceeds the net (taxable) income of the trust (due to other losses in the trust), to ensure the entire capital gain is distributed to the beneficiaries, the trustee should not attempt to stream any part of the capital gain;
• If the capital losses exceed the capital gain, there is no capital gain available for streaming as there will be no net (taxable) capital gain.
• Net capital gains whether streamed or not) are extracted from the net (taxable) income and are disclosed separately in the Statement of distribution at Label F and in the beneficiary’s return.
• The beneficiary includes their share of the net (taxable) capital gain in their assessable income after it has been grossed-up as has been reduced by any capital losses and/or the 50% discount and 50% active asset reduction.