Tax Tip 309: CGT when Beneficiary of a Trust Capital Gain has Carried Forward Capital Losses

The trustee of a discretionary trust might make an individual beneficiary presently entitled to a capital gain of the trust.

This individual would first need to gross up the capital gain (i.e. before the 50% CGT discount) and then apply their carried forward losses and then apply the 50% CGT discount.


Example

Bart lost $100,000 when he invested in some dud shares. This was a capital loss and he has carried it forward for a number of years.

Bart is a beneficiary of a discretionary trust which has a capital gain of $100,000.

The trustee of the trust can apply the 50% CGT discount as the property which was sold was held for more than 12 months. This would reduce the capital gain to $50,000.

Bart initially thinks great, I have received $100,000 and I still get to carry forward $50,000 of the capital loss as it won’t all be used.

Sorry Bart, says the taxman. The carried forward loss is first used to reduce the capital gain.

Bart’s $100,000 loss is applied to the full $100,000 capital gain (not the $50,000 after the discount).

This uses up his entire loss and he has no remaining loss to carry forward.

But, the good part is Bart does not need to pay any tax on the $100,000 capital gain.

 

But complications can arise. A non-resident beneficiary. A child beneficiary. Or defective trust resolutions.
Can the trust stream capital gains ?