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
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
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
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
investment style employed;
nature of the assets held;
length of time investments are held and regularity in sale
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.
The income tax treatment of any property lease incentive will vary, depending on the nature of the inducement provided.
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