CGT Event E4: Tax Timing Adjustments and the Risk of Double Taxation
Professor Brett Davies from Legal Consolidated emphasises the importance for practitioners to stay informed about CGT event E4. This is particularly true when dealing with unit trusts. This event may occur when payments are made to unitholders, with some amounts not being included in their assessable income (non-assessable part).
In certain situations, depending on when distributable income is paid, a unitholder might face the risk of potential double taxation on the same income – first under s 97 of the ITAA 1936 and also as a capital gain under CGT event E4.
If CGT event E4 takes place, the cost base of the units can be adjusted downwards. Obviously, it can not go below nil. This adjustment is subject to exclusions or modifications to the non-assessable part. Any remaining balance after the cost base reduction becomes assessable to the unitholder as a capital gain.
CGT event E4 is not restricted to corpus distributions or capital payments
While many disagree, both Legal Consolidated and the ATO hold the view that CGT event E4 is not restricted to corpus distributions or capital payments. Tax timing adjustments, such as differences between distributable income and taxable income, can trigger CGT event E4. Examples include accrued expenses, capital works deductions, and tax-free components of capital gains. This is the ATO’s position.
The ATO takes a comparable stance in Private Binding Ruling PBR 1012974011502 (advice date: 24 February 2016). In the ruling, the Commissioner determined that if the funds distributed later can be traced back to previously taxed funds, CGT event E4 will not occur. This is because the payment representing the expenses has already been accounted for in the assessable income of the unitholders in prior years.
The law firm is seeing this misalignment in timing as leading to potential double taxation for unitholders.
Does Legal Consolidated Unit Trust Deeds allow for CGT event E4 remedies?
Legal Consolidated Unit Trust Deeds and Unit Trust Updates play a crucial role by allowing for all such strategies. The flexibility provided by these legal instruments enables practitioners to implement solutions, such as adjusting timing for trust distributions, on-lending funds, or aligning distributable income with taxable income when feasible. Nevertheless, navigating CGT event E4 requires careful planning, given the complexities involved in tax timing adjustments.
|Unit Trust Deed – with both pre-emptive rights and Unitholder asset protection
|Vesting Deed – to wind up your Unit Trust
|Company to be trustee of a Unit Trust – corporate trustee for asset protection
|Update the Trustees of the Unit Trust – remove and replace the trustee of your Unit Trust
|Change the Name of your Unit Trust – update the name of your Unit Trust
|Unitholders Agreement – the Unitholders’ set of rules that also protects from litigation