The trust’s gain was made directly or indirectly through a trust, a public unit trust or a partnership (these entities are prescribed by subsection (4)); and
The gain is in relation to a CGT asset covered by subsection (2), namely a new residential dwelling or another CGT asset determined by the Minister.
[Schedule 1, item 30, subsections 115‑102(1), (2) and (4) of the ITAA 1997]
The Minister may make a legislative instrument to determine additional types of CGT asset covered by section 115-102(2). This power gives flexibility for the Minister to ensure the CGT arrangements reflect Australia’s needs as they evolve over time, while ensuring the arrangements are subject to Parliamentary scrutiny, disallowance and sunsetting.[Schedule 1, item 30, subsection 115-102(3) of the ITAA 1997]
Instead of applying the CGT discount, an individual or trustee may choose to index the cost base of the new residential dwelling asset. The existing ‘choice’ rules under section 103-25 apply to the making of this choice, with the modification that the realisation event is the relevant CGT event for the choice. This means that the choice must be made on or before the day the entity’s income tax return is lodged for the income year in which the realisation event happens. [Schedule 1, item 30, subsection 115-102(5) of the ITAA 1997]
If a trustee chooses for the cost base indexation method to apply to the capital gain, the same method applies to a beneficiary as though the choice to apply indexation was made by the beneficiary.
Making a discount gain under section 115-102 (direct)
Siobhan, an Australian resident, acquires land in May 2028 and constructs a building that meets the conditions prescribed for meeting the definition of a ‘new residential dwelling’. Siobhan will continue to be an Australian resident and holds the land on which the dwelling is constructed for more than 12 months.
For working out a net capital gain in a later year sale, a calculated capital gain for the sale will be a residential capital gain which is a discount capital gain. A discount percentage of 50 per cent can be applied to the capital gain. Alternatively, Siobhan can choose not to apply the discount percentage and instead calculate the capital gain using an indexed cost base.
Making a discount gain under section 115-102 (indirect)
The Trustee of the Gardenia Trust, an Australian resident trust, makes a capital gain of $800,000 from the sale of a CGT asset that comprises a new residential dwelling. The asset was held for more than 12 months. The Trustee applies the discount percentage (which, for the trust, is 0 per cent) to the capital gain in working out a net capital gain for the income year and makes an individual beneficiary Henri specifically entitled to a 40 per cent share of the capital gain. Henri is an Australian resident.
Henri will apply the method in section 115-215 to determine that he has a capital gain equal to $320,000. In determining if he has a net capital gain for the income year, Henri can apply the discount percentage of 50 per cent which is applicable to him as an individual with a capital gain from a new residential dwelling, to any part of the capital gain remaining after step 4 of the method statement in subsection 102‑5(1). Henri is not able to make a choice to apply indexation instead.
Investor disposing of property used for affordable housing
For individuals and trusts that hold CGT assets which are dwellings used to provide affordable housing, they can continue to apply the discount method in determining their net capital gains.
Entities that make capital gains from assets that are used to provide affordable housing can choose to apply the CGT discount method under section 115-125. Where this occurs, these assets are excluded from cost base indexation. Further, if the assets are held directly by the individuals or in some circumstances by trusts (covered in the discussion of Division 112 above), the asset may be excluded from the deemed sale and deemed reacquisition provisions under Subdivision 112-E. [Schedule 1, items 13 and 36, paragraphs 112-155(1)(e), 112-165(1)(e) and subsection 115-125(6) of the ITAA 1997]
Section 115-125 applies where an investor disposes of a property that was used for affordable housing for at least 1095 days (3 years) since 1 January 2018. Under the old law, the discount percentage which would apply apart from this section was increased by a percentage calculated using a formula that accounts for the time the property was used for affordable housing.
Previously, section 115-125 provided for an increase in the 50 per cent CGT discount that would otherwise apply that could result in a discount of up to 60 per cent for an Australian resident individual. The amendments maintain the existing base CGT discount of 50 per cent for individuals and trusts and continue to allow this discount to increase to up to 60 per cent. The amendments also ensure that the existing proportionate reductions in the discount for individuals who are foreign or temporary residents continue to apply. [Schedule 1, items 35, paragraph 115-125(4)(a) of the ITAA 1997]
If the discount percentage calculated under section 115-125 is 60 per cent, then the individual or trustee disposing of the property may choose to index the cost base under section 110-36(1A) instead of applying the CGT discount. An explanatory note is inserted earlier in the provision to alert readers to this choice.[Schedule 1, items 31, 32 and 36, explanatory notes to subsection 115-125(2) and subsection 115-125(6) of the ITAA 1997]
If indexation is chosen by the individual or trustee, the existing ‘choice’ rules under section 103-25 apply. The realisation event is the relevant CGT event for the choice. The choice must be made on or before the day the entity’s income tax return is lodged for the income year in which the realisation event happens.[Schedule 1, item 36, subsection 115-125(6) of the ITAA 1997]
If a trustee chooses the indexation method to apply to the capital gain, the same method applies to a beneficiary as though the choice to apply indexation was made by the beneficiary.
Subdivision 115-C amendments for trusts with net capital gains
Broadly, the existing Subdivision 115-C provides that amounts of the trust’s net income that are attributable to capital gains are treated as a beneficiary’s capital gain when the beneficiary is assessed. This allows the beneficiary to apply the beneficiary’s capital losses and their own discount percentage against the capital gain they receive through the trust estate.
The rules also apply to attribute capital gains where the trustee is assessed where a beneficiary is under a legal disability or is subject to trustee taxation.
Attributable gains under section 115-225 to reverse out indexation for CGT events happening on or after 1 July 2027
Under the current law, the attributable gain calculation under subsection 115‑225(1) requires the trust to determine the amount of the capital gain remaining after applying steps 1-4 of the existing method statement in section 102-5. This would take into account any discount or indexation available to the trust in determining the benefits to which beneficiaries may be made presently entitled.
A different amount is substituted where the net income of the trust for an income year is less than the sum of the trust’s net capital gain and certain amounts related to franked distributions. The amendments provide a modification to the general rule in subsection 115-225(1) (by feeding into new subsections 115-225(4) to (6)) where a capital gain has been worked out under the new CGT law (i.e. indexation of the cost base of CGT assets for CGT events occurring on or after 1 July 2027) for the following cases:
for the deemed attribution of capital gains of a trust estate to a beneficiary where the beneficiary is not entitled to indexation in relation to the cost base (i.e. because they are a company or a foreign resident beneficiary); or
where for the deemed attribution of capital gains of a trust estate to a beneficiary where the trustee has a choice to choose between applying the CGT discount or indexation because the capital gains arise from new residential dwellings or affordable housing; or
a calculation is being done to determine a trustee’s taxation amount. [Schedule 1, items 41 and 42, subsection 115-225(4) of the ITAA 1997]
In working out the trust’s capital gains in these situations, the amendments apply to reverse out the cost base indexation amounts for the relevant capital gain. This is because the beneficiary or trustee who is subject to tax on the capital gain is not entitled to indexation.
In addition, for these calculations to reverse indexation, it is assumed that the application of capital losses (current and carried forward) and quarantined amounts (under the negative gearing changes) would still be the same and would not reduce the capital gain. This ensures the reversal of indexation does not affect the capital losses or quarantined amounts being applied. [Schedule 1, item 42, subsections 115-225(5) and (6) of the ITAA 1997]
Trust capital gains attributable to corporate beneficiary who is not entitled to indexation
The JTS Trust is a discretionary trust. During the 2030-31 income year, its only activity is the disposal of shares acquired on 1 July 2027 for $100,000.
After applying CPI indexation, the trust calculates an indexed cost base of $110,000. The shares are sold for $200,000, giving rise to a capital gain of $90,000. As this is the trust’s only income, the trust’s net income is also $90,000, calculated on the basis that the trust is a resident individual and therefore entitled to apply indexation.
Before year end, the trustee resolves to make XYZ Pty Ltd (a private company) and Catherine (a resident individual) each specifically entitled to 50% of the capital gain. This means the indexed gain is split evenly, so each beneficiary is attributed a $45,000 share. In effect, the indexation adjustment is shared 50-50 between them.
Catherine includes her $45,000 share of the capital gain in working out her net capital gain. She does not re-index the cost base, as indexation has already been applied at the trust level.
XYZ Pty Ltd, however, is not entitled to indexation. It must recalculate its attributable gain as if the capital gain had been calculated without indexation.
On that basis, its attributable gain is equal to its 50 per cent share (expressed as a fraction) of the capital gain, being $200,000 capital proceeds less the unindexed cost base ($100,000), giving a capital gain of $50,000.
The amendments also make consequential changes to Subdivision 115‑C to reflect the new CGT laws starting from 1 July 2027 including where a trust still has the choice to refrain from choosing indexation to apply the CGT discount on capital gains arising from new residential dwellings and affordable housing CGT assets, so as to allow relevant beneficiaries to choose the discount. [Schedule 1 items 25, 26, 37, 38, 39, 40, 67, 69, 70, 71 and 72, subparagraph 115‑225(3)(a)(i), paragraphs 115‑215(4)(a), 115‑215(3)(a), (b) and (c), 115‑220(2)(b), 115‑222(4)(a), 115‑225(1)(a), subsection 115‑215(4), sections 115‑1 and 115‑200, note to subsection 115‑210(1) and heading to Division 115 of the ITAA 1997]
Providing information to beneficiaries
Under the amendments, the Commissioner of Taxation can, by legislative instrument, require a trustee of a trust estate to provide sufficient information to each beneficiary of the trust who, in relation to that income year, is treated as having any capital gain under Subdivision 115-C because of a capital gain of the trust estate.[Schedule 1, item 43, subsection 115-235(1) of the ITAA 1997]
This information enables each beneficiary to comply with their own obligations in relation to Part 3-1 and Part 3-3. The requirement for trustees to report is broadly similar to existing requirements for trustees of MITs, though given the differences between MITs and other trusts there are likely to be significant differences in many features of the reporting, including timing.
As the information is necessary for beneficiaries, a trustee’s failure to comply with the requirement to provide information to beneficiaries is subject to an administrative penalty. The penalty is set in the TAA and is consistent with other penalties for non-compliance with reporting obligations.[Schedule 1, items 52 and 53, subsection 286-75(2) and paragraph 286‑80(2)(a) of the TAA 1953]
The statement provided to each beneficiary must:
be in the approved form; and
provide the relevant information in relation to the class of capital gains and the effect of each of those gains under subsection 115-215(4). [Schedule 1 item 43, subsection 115-235(2) of the ITAA 1997]
The due date for providing information to beneficiaries is the date determined by the Commissioner of Taxation by legislative instrument. This aligns with similar arrangements under which the Commissioner determines appropriate timing and operational matters (such as the Annual Investment Income Report in section 393-10 in Schedule 1 to the TAA 1953).
This amendment is not intended to duplicate existing reporting requirements for trustees under the Annual Investment Income Report. The amendments only cover the trustees who do not currently provide this information to its beneficiaries in an existing reporting regime. [Schedule 1, item 43, subsection 115-235(3) of the ITAA 1997]
Extended application of Subdivision 115-C - where indexation means trust has no net capital gain
The amendments extend the application of Subdivision 115-C to situations where:
a trust has one or more capital gains that have been worked out under the new CGT law (i.e. indexation of the cost base for CGT events occurring on or after 1 July 2027); and
Subdivision 115-C does not apply because the trust does not have net income arising from a capital gain and therefore subsection 115‑210(1) does not apply; and
Subdivision 115-C would apply if, in working out the trust’s net capital gain for the income year, the following assumptions were applied in relation to each capital gain:
the cost base indexation amounts for the relevant capital gain is reversed out; and
the application of capital losses (current and carried forward) and quarantined amounts (under the negative gearing changes) would still be the same and would not reduce the capital gain.[Schedule 1, item 44, subsection 115-255(1) of the ITAA 1997]
The amendments extend the application of Subdivision 115-C to allow a trustee to stream a capital gain to a beneficiary where the trust has no net capital gain because of indexation.
As a result of the extended application of Subdivision 115-C, the reporting requirements between the trustee and beneficiary would also apply to this capital gain. [Schedule 1, item 44, subsection 115-255(2) of the ITAA 1997]
For the avoidance of doubt:
The reference to the trust estate’s net income in subsection 115-215(1), which sets out the purpose of the section (broadly, being to ensure that appropriate amounts of the trust estate’s net income attributable to capital gains are treated as the beneficiary’s capital gains), does not limit the application of section 115-215 for those purposes.
Subsection 115-210(2) ensures that like Subdivision 115-C, Subdivision 115-CA only applies to complying superannuation in their capacity as a beneficiary of other trusts (but not as a trust estate in its own right).
Any reference in a taxation law to Subdivision 115-C or a provision in Subdivision 115-C includes a reference to Subdivision 115-CA (which is within that Subdivision) or that provision as it applies because of Subdivision 115-CA. [Schedule 1, item 44, subsections 115-255(3) to (5) of the ITAA 1997]
Application of amendments
The amendments to Subdivision 115-C apply in relation to assessments for the income year that includes 1 July 2027 and later income years. [Schedule 1, subitem 84(1)]
The amendments which require a trustee to provide information to beneficiaries relating to their capital gains applies in relation to the income year that includes 1 July 2027 and later income years. [Schedule 1, subitem 84(2)]
The new Subdivision 115-CA which extends the application of Subdivision 115-C applies in relation to assessments for the income year that includes 1 July 2027 and later income years. [Schedule 1, subitem 84(3)]
Minimum tax on capital gains
Overview
A minimum 30 per cent income tax on capital gains that are realised on or after 1 July 2027 is introduced by new Division 119 of the ITAA 1997 and amendments to the Rates Act.[Schedule 1, items 58 and 60, Division 119 of the ITAA 1997 and Division 119 of the ITTP Act 1997 and the Imposition Bill, Schedule 1, item 1, section 12AA of the Rates Act]
The introduction of the minimum tax reduces the benefit of taxpayers deferring the realisation of capital gains to years where their marginal tax rates are low. This approach ensures gains are subject to a tax rate closer to the rate an individual faced during their working life and is commensurate with the tax rate paid by most workers.
An individual who is an Australian resident may have to pay an extra amount of tax to ensure a minimum 30 per cent rate of tax applies to relevant capital gains (before applying offsets). New Division 119 sets out how to work out when extra income tax is payable and matters relating to the amount of that tax. Having determined that an individual is subject to extra tax, the tax rate is set by the Rates Act.