CGT Event E8 

 

 What is CGT Event E8?

CGT Event E8 broadly involves a situation where a beneficiary under a trust disposes of an interest in trust capital (or part of it) and where no money or property was given to acquire that interest.

CGT Event E8 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 interest is disposed to the trustee of the trust or where the interest is acquired by assignment. However, another CGT Event such as event A1 could apply in that situation.

The rules dealing with CGT Event E8 are primarily contained in section 104-90, 104-95 and 104-100 of the ITAA.

When does CGT Event E8 occur?

CGT Event E8 occurs at the time the beneficiary taxpayer enters into the relevant contract for disposal of their interest. If there is no contract, when the beneficiary taxpayer stops owning the interest.

How to calculate CGT Event E8 capital gain or loss

A capital gain

If the taxpayer is the only beneficiary with an interest in the trust capital and the beneficiary disposes of that interest, the beneficiary makes a capital gain if (and to the extent) the capital proceeds from the disposal exceed the net asset amount. The net asset amount is calculated using the following steps at the time disposal:

  • Work out the total cost base of all CGT assets the trustee acquired on or after 20 September 1985 that formed part of the trust capital.
  • Work out the total market values of all CGT assets the trustee acquired before 20 September 1985 that formed part of the trust capital.
  • Work out the total amount of money that formed part of the trust capital.
  • Add up the amounts at step 1, 2 and 3.
  • Reduce the step 4 amount by the amount of any liabilities of the trust.
  • The result is the net asset amount.

Note that the capital proceeds market value substitution rule (section 116-30 ITAA) can apply if actual capital proceeds do not align with market value and where the parties are not dealing at arm’s length.

Section 104-95 provides the following example. The total cost base of the CGT assets that the trustee acquired on or after 20 September 1985 is $6,000. The total market values of the CGT assets acquired before 20 September 1985 is $2,500. There is $1,000 in the trust and trust liabilities are $500.

Here, the net asset amount is: $6,000 + $2,500 + $1,000 – $500 = $9,000. The beneficiary taxpayer makes a capital gain of $10,000 – $9,000 = $1,000.

If there is more than one beneficiary with an interest in the trust capital, the same principles apply. However, the capital gain is calculated as the capital proceeds from disposal less the net asset amount multiplied by the taxpayer’s interest in the trust capital (expressed as a fraction).

If a part interest is disposed, the capital gain calculation only should only have regard to that part interest.

A capital loss

A capital loss is calculated using a similar process to calculate a capital gain. However, the concept of reduced net asset amount applies instead of net asset amount. The concepts are similar except that step 1 of the method statement involves working out the total reduced cost base of CGT assets acquired on or after 20 September 1985 instead of the total cost base of same.

Instances where CGT Event E8 can occur

CGT Event E8 is often observed in the context of equitable remainder interests, where the remainder owner disposes of their post-CGT interest (or part interest) in trust capital.

In TR 2006/14, the ATO provides guidance on CGT Event E8. It also provides a helpful example which we have adapted below.

Craig owns a large share portfolio. Some shares were acquired pre-CGT and some post-CGT. Craig declares that he holds the shares on trust to pay the income to his favourite great aunt, Genevieve, for life and the remainder for himself and his wife Jane. If Craig or Jane dispose of their interest, CGT Event E8 will apply. If Genevieve assigns her interest CGT Event A1 will apply if the conditions under that event are satisfied.

In TD 2009/19, the ATO takes the position that a taker in default of trust capital does not have an interest in trust capital for the purposes of CGT Event E8.

Take the example of ABC trust that is established with a deed which confers powers of appointment of income and capital on the trustee for the benefit of several potential beneficiaries. Under the deed, Tom is named as the taker in default who on the termination date will take any trust capital that has not been appointed. CGT Event E8 does not happen if Tom disposes of his interest. This is because Tom’s interest does not constitute a vested and indefeasible interest in trust capital. However, the disposal of the interest could result in CGT Event A1 unless an exception relevant to that event applies.

Exceptions

The taxpayer disregards a capital gain under CGT Event E8 if the interest in the trust capital was acquired before 20 September 1985. Although, keep in mind that a pre-CGT interest might still be caught if CGT Event K6 applies.

As addressed earlier, CGT Event E8 will not apply where the relevant trust is a trust to which Division 128 applies. In the context of CGT Event E8, this exception is relevant where – during the administration of a deceased estate – the intended remainder owner disposes of their interest.

CGT discounts and concessions

The general CGT discount (Division 115 ITAA) and the small business CGT concessions (Division 152 ITAA) may be available to discount or eliminate a capital gain under CGT Event E8 so long as the respective eligibility conditions are satisfied.

 

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.