Issue
Can a beneficiary of a discretionary trust apply a capital loss, made by the trust in an earlier year, to reduce a capital gain made by the beneficiary in the current year under the method statement in subsection 102-5(1) of the Income Tax Assessment Act 1997 ('ITAA 1997')?
Decision
No. The method statement in subsection 102-5(1) of the ITAA 1997 does not allow a beneficiary to apply a capital loss made by the trust to reduce a capital gain made by the beneficiary.
Facts
The taxpayer was a beneficiary of a discretionary trust that conducted a business.
The trust made a capital loss some years ago when it ceased to operate the business.
The taxpayer wants to apply the loss made by the trust to reduce a capital gain made by the taxpayer on the disposal of property owned by the taxpayer in the current year of tax.
Reasons for Decision
Subsection 102-5(1) of the ITAA 1997 provides the method to be used for working out the net capital gain (if any) which is to be included in your assessable income for the income year.
Under subsection 102-5(1) of the ITAA 1997 the net capital gain is worked out by reducing the capital gains made during the income year by the capital losses (if any) made during the income year. The capital gain is reduced by applying any unapplied net capital losses made in previous years.
Section 102-20 of the ITAA 1997 provides that a capital gain or a capital loss is made if, and only if, a CGT event happens. The gain or loss is made at the time of the event.
A full list of CGT events is in section 104-5 of the ITAA 1997. There is no CGT event which is applicable to allow the transfer of a capital loss made by a trust to a beneficiary of the trust.
Under subsection 102-5(1) of the ITAA 1997, the beneficiary can only reduce a capital gain by a capital loss the beneficiary has personally made as the result of a CGT event happening in accordance with section 102-20 of the ITAA 1997.