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- A trust’s investment portfolio is not automatically on capital account
A trust’s investment portfolio is not automatically on capital account
- By Allan Mortel
- Published 25/08/2011
- Moore Tax News
- Unrated
The ATO has finalised a Tax Determination that deals with whether gains and losses from the disposal of investments held by a trust are on revenue or capital account.
Accordingly, we recommend trustees review the tax treatment of gains and losses on disposal of investments and the tax status of their existing investments, particularly if revenue or capital losses have been recouped or carried forward as this is a current focus of ATO activity. Incorrect classification may lead to potentially adverse consequences for trustees and unitholders.
Managed Investment Trusts (MIT’s) that have made the capital account election should not disregard this Determination, as it may be applicable. A gain or loss made by a MIT will be characterised in accordance with this Determination if the gain/loss relates to an asset that is not a ‘covered asset’ for capital account election purposes, or if the trust fails to qualify as a MIT in a subsequent financial year (in which case the capital election previously made has no effect).
Taxation Determination TD 2011/21 Income tax: does it follow merely from the fact that an investment has been made by a trustee that any gain or loss from the investment will be on capital for tax purposes? applies retrospectively and prospectively. The short answer to the question posed by the Determination is ‘No’. Instead, the character of a gain or loss must be determined with reference to the income tax law, and to a trust’s specific circumstances and all of the relevant facts.
The Determination is substantially the same as the draft released in March. It follows on from the ATO’s intention to target the incorrect classification of revenue and capital losses, as expressed in its 2011-12 Compliance Program released in June.
An incorrect classification of gains and losses could cause problems for trustees and unitholders. It may result in a tax liability for the trustee, a recalculation of withholding tax obligations for non-resident unitholders and/or amendments to unitholder tax statements and the income tax returns of unitholders.
The Determination lists a number of factors to assist trustees with the revenue/capital distinction. They include the:
Accordingly, we recommend trustees review the tax treatment of gains and losses on disposal of investments and the tax status of their existing investments, particularly if revenue or capital losses have been recouped or carried forward as this is a current focus of ATO activity. Incorrect classification may lead to potentially adverse consequences for trustees and unitholders.
Managed Investment Trusts (MIT’s) that have made the capital account election should not disregard this Determination, as it may be applicable. A gain or loss made by a MIT will be characterised in accordance with this Determination if the gain/loss relates to an asset that is not a ‘covered asset’ for capital account election purposes, or if the trust fails to qualify as a MIT in a subsequent financial year (in which case the capital election previously made has no effect).
Taxation Determination TD 2011/21 Income tax: does it follow merely from the fact that an investment has been made by a trustee that any gain or loss from the investment will be on capital for tax purposes? applies retrospectively and prospectively. The short answer to the question posed by the Determination is ‘No’. Instead, the character of a gain or loss must be determined with reference to the income tax law, and to a trust’s specific circumstances and all of the relevant facts.
The Determination is substantially the same as the draft released in March. It follows on from the ATO’s intention to target the incorrect classification of revenue and capital losses, as expressed in its 2011-12 Compliance Program released in June.
An incorrect classification of gains and losses could cause problems for trustees and unitholders. It may result in a tax liability for the trustee, a recalculation of withholding tax obligations for non-resident unitholders and/or amendments to unitholder tax statements and the income tax returns of unitholders.
The Determination lists a number of factors to assist trustees with the revenue/capital distinction. They include the:
- nature of the trust and the terms and content of the trustee’s duties;
- investment style employed;
- nature of the assets held;
- length of time investments are held and regularity in sale activities;
- average annual turnover of trust assets; and
- whether or not there is a predetermined rule or criteria which triggers the decision to dispose of an asset.
The Determination also outlines factors which support a capital account conclusion. These factors have been based on the 2005 tax ruling for listed investment companies, Taxation Ruling TR 2005/23 Income tax: listed investment companies.
For further information regarding the Determination, or assistance in reviewing the tax treatment of gains/losses from your trust’s investment portfolio, please contact your Moore Stephens relationship partner.
Authors: Allan Mortel, Director, and Maris Cilia, Senior, Moore Stephens Sydney
Contact
Allan Mortel
T +61 2 8236 7700
amortel@moorestephens.com.au
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