CGT Event E7

 

CGT Event E7 involves a situation where the trustee of a trust disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary’s interest, or part of it, in the trust capital.

Event E7 does not apply where the trust is a unit trust or a trust to which Division 128 applies. Note that Division 128 of the Income Tax Assessment Act 1997 (ITAA) covers matters pertaining to deceased estates.

The rules dealing with event E7 are primarily contained in section 104-85 of the ITAA.

When does CGT Event E7 occur?

CGT Event E7 occurs at time the trustee disposes of the relevant CGT asset to the beneficiary.

How to calculate CGT Event E7 capital gain or capital loss

It is possible for both the trustee and the beneficiary to make a capital gain or loss.

The trustee makes a capital gain if (and to the extent) the market value of the relevant asset at the time of its disposal exceeds its cost base. The trustee makes a capital loss if the market value of the asset is less than its reduced cost base.

The beneficiary makes a capital gain if (and to the extent) the market value of the asset at the time of disposal exceeds the cost base of the interest, or the part of it being satisfied. The beneficiary makes a capital loss if the market value of the asset is less than the reduced cost base of that interest or part.

For both calculations, the first element of the cost base and reduced cost base is the sum of any money and the market value of any property given to acquire it. However, the market value substitution rule (section 112-20 ITAA) may apply to dictate the first element of the cost base and reduced cost base nothing was paid to acquire the CGT asset or if it was acquired under a non-arm’s-length dealing.

Instances where CGT Event E7 may occur

CGT Event E7 is often observed in the context of equitable remainder interests, as these provide the owner of the interest with right to receive capital from a trust. E7 might happen where, for instance, there is an agreement to wind up a testamentary trust such that trust assets are disposed to beneficiaries in satisfaction of their remainder interest.

Exceptions

The trustee disregards any capital gain or capital loss if the asset disposed to the beneficiary was acquired before 20 September 1985 (i.e. pre-CGT). Similarly, the beneficiary disregards any capital gain or capital loss if their right (e.g. their remainder interest) was acquired pre-CGT.

The beneficiary also disregards any capital gain or capital loss in the following circumstances:

the interest was acquired (except by way of assignment) for no expenditure; or

all or part of the capital gain or capital loss the trustee makes is disregarded under the main residence exemption.

The reference to a trust to which Division 128 applies is essentially where an asset the deceased owned at the time of their death passes to the relevant beneficiary in compliance with section 128-20 ITAA. Without delving into that section, key requirements include that the asset moves to a beneficiary in accordance with the terms of the will, or under the terms of a contemplated deed of a family arrangement.

Example

In TR 2006/14, the ATO provides helpful examples on event E7. We have adapted one of the examples below. Note, CGT Event E7 technically also applies in respect of the wife’s interest. We have ignored the effects of that event for present purposes.

Hector dies in 2000 and his will provides that his property be held on trust for his wife for life for his three daughters in remainder in equal shares. Hector acquired the property in 1993. At the time of death, the property had a cost base of $400,000. Hector’s daughters acquired their interests in the testamentary trust for no consideration.

In the 2005/06 income year, the wife and daughters agreed to wind up the trust and have the property distributed to them as tenants in common in equal shares (a ¼ interest each). At this time, the market value of the property was $1,200,000. The disposal of ¾ of the land to the daughters satisfies their interest in the asset and results in CGT Event E7 happening to the parts of the land transferred to them.

The exception for trusts to which Division 128 applies has no relevance because of non-compliance with section 128-20 on the basis that the interests in the property are not passing under the terms of the will nor a deed of family arrangement.

Because of event E7, the trustee of the trust makes a capital gain of $600,000 (3/4 x $1,200,000) – (3/4 x $400,000).

As the daughters did not pay anything for their interest, or acquire them by assignment, the capital gain they made is disregarded.

In this example, event E6 would not have applied if the deed of family agreement had been compliant with section 128-20.

CGT discounts and concessions

The general CGT discount (Division 115 ITAA), the small business CGT concessions (Division 152 ITAA), and the main residence exemption (Subdivision 118-B) may be available to discount or eliminate a capital gain under CGT Event E7 so long as respective eligibility conditions are satisfied. However, the main residence exemption will not be available to disregard gains if a dwelling is acquired from a deceased estate.

 

This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.