CGT - trusts - non assessable distributions - reduced cost base

Is the reduced cost base of a unit or interest in a trust nil, if CGT event E4 in section 104-70 of the Income Tax Assessment Act 1997 (ITAA 1997) happens and the non-assessable payment received from the trustee exceeds the reduced cost base, but is less than the cost base, of the unit or interest?

Yes. Under paragraph 104-70(6)(b) of the ITAA 1997 the reduced cost base of a unit or interest in a trust is reduced to nil if a non-assessable payment from the trustee is received that exceeds the reduced cost base, but not the cost base of the unit or trust interest.

An interest in a trust is acquired on or after 20 September 1985.

A payment is received from the trust in respect of the interest in an income year. No part of the payment is included in assessable income. No other non-assessable payment is received in the income year.

Just before the end of the income year in which the payment is made, the cost base of the interest is greater than the payment, and the reduced cost base is less than the payment.

CGT event E4 in section 104-70 of the ITAA 1997 happens if a non-assessable payment is received in respect of a unit or interest in a trust. If CGT event E4 happens, the consequences include cost base and reduced cost base reductions for the unit or trust interest.

If the non-assessable payment exceeds the cost base of the unit or interest in the trust, a capital gain arises: subsection 104-70(4) of the ITAA 1997. In this case, subsection 104-70(5) of the ITAA 1997 makes it clear that the cost base and reduced cost base of the unit or interest in the trust is reduced to nil.

If the non-assessable payment is not more than the cost base of the unit or interest in the trust, then the cost base and reduced cost base of the unit or interest are reduced under paragraph 104-70(6)(b) of the ITAA 1997 by the amount of the payment. An issue arises as to whether the reduced cost base can be a negative amount if the non assessable payment is greater than the reduced cost base, but less than the cost base of the share.

The predecessor to section 104-70 of the ITAA 1997 was section 160ZM of the ITAA 1936. Under subparagraph 160ZM(2)(b)(ii) of the ITAA 1936, where a non assessable distribution exceeded the reduced cost base of a unit or interest, the interest holder was treated as if they had disposed of the unit or interest and re-acquired it 'without having paid or given any consideration in respect of the re-acquisition'. This would result in the unit or interest having a reduced cost base equal to nil.

The explanatory memorandum for the Bill that introduced section 140-170 of the ITAA 1997 (Taxation Laws Improvement Bill (No.1) 1998) does not indicate that the different words in that provision were intended to change the meaning in section 160ZM of the ITAA 1936. Section 1-3 of the ITAA 1997 states that if a different form of words has been used in the ITAA 1997 to rewrite an idea expressed in the ITAA 1936, and it appears that the different form of words have been used in order to use a clearer or simpler style, then the idea is not taken to be different just because different forms of words were used.

Therefore paragraph 104-70(6)(b) of the ITAA 1997 will operate in the same way as subparagraph 160ZM(2)(b)(ii) of the ITAA 1936. Thus, if the non-assessable payment is less than the cost base of the unit or interest in the trust, but greater than the reduced cost base, the reduced cost base is reduced to nil but not below nil.