Streaming a capital gain, an unpaid present entitlement and a prior-year trust loss

A beneficiary is taxed on the trust's capital gain only through specific entitlement. Under s115-228 a beneficiary is specifically entitled to a gain only if the trustee records, in the deed or in a record of the trustee's decision made before the end of the income year, that the beneficiary is entitled to a share of that capital gain, and that share is reflected in the accounts or records.

The 28 June resolution appoints only 'the income of the Trust'. The accounts do not treat capital gains as income, so the gain is not part of the trust income and no record specifies the gain to anyone. Specific entitlement therefore fails.

Consequences:

• the gain still forms part of the net income of the trust estate (s95), computed after the 50% CGT discount because the shares were held since 2016 and the trust is a resident trust estate;
• no beneficiary is presently entitled to that part of the net income, so the trustee is assessed under s99A at 47%: 50% × $960,000 = $480,000 × 47% = $225,600;
• the trustee cannot use Maria's or Nino's marginal rates, tax-free thresholds or capital losses, and the 15% Div 293 style issues do not arise but the top rate applies automatically.

Better outcome: a resolution before 30 June 2025 specifically entitling Della/Nino (or both, split to use their marginal rates) to the gain. Appointing it to Marano Holdings would forfeit the 50% discount because companies get none: 25% × $960,000 = $240,000 plus a Division 7A unpaid entitlement - worse than the trustee outcome here.

The trust owes a private company $200,000. Following TR 2010/3 and PS LA 2010/4, where a company beneficiary's unpaid present entitlement is not paid by the lodgment day for the year the entitlement arose (the earlier of the due date and the actual lodgment date), the trustee is treated as holding the amount on a sub-trust for the company. If the funds are not on complying terms, the entitlement is treated as a loan from the company to the trust for Division 7A.

Here the lodgment day for 2023-24 was 15 May 2025. Nothing was paid and no agreement was put in place, so the $200,000 is a deemed dividend under ss109D and 109E. It is included in the trust's assessable income as a dividend (not a capital gain), is not frankable and carries no franking credit, and flows through to beneficiaries under Division 6 unless appointed otherwise.

What should have happened, and what can still happen for the 2024-25 entitlement (lodgment day 15 May 2026):

• pay the entitlement before the lodgment day, including by transferring trust assets;
• put it on complying loan terms under s109N - a written agreement signed before the lodgment day, maximum 7 years unsecured (25 years if secured by a registered mortgage), with minimum yearly repayments of principal and interest at the benchmark rate (8.77% for 2024-25);
• consider whether the 2024-25 appointment should go to the company at all, given the company rate of 25% and the follow-on UPE.

A forgiveness or backdated agreement will not cure the 2023-24 deemed dividend.

This is a prior-year revenue loss, so the trust loss rules in Schedule 2F ITAA 1936 apply. A discretionary trust has no fixed entitlements, so it cannot pass the 50% stake test. It must rely on the pattern of distributions test or the business continuity test.

Pattern of distributions test (s269-60): the trust must continue to distribute at least 50% of the amounts distributed in the loss year to the same beneficiaries in each intervening year. In 2021-22 the whole was distributed to Maria (40%), Nino (30%) and Marano Holdings (30%). In 2022-23 the whole $700,000 went to Maria's parents, who received nothing in 2021-22. The pattern is broken and the test fails.

Fallback - business continuity test: the trust must carry on the same business throughout the period, must not enter a new business, and must not enter transactions outside the ordinary course that could change beneficial interests. The nursery has run continuously since 2009 with no new business, and ordinary distributions of profit are generally disregarded. If the trustee can document same-business continuity, the loss is deductible despite the failed pattern test.

If deductible, the $300,000 reduces net income before apportionment, so less flows to beneficiaries and part of the effective benefit may be wasted against the trustee-assessed gain. If not deductible, $300,000 of 2024-25 income bears tax unnecessarily. Recommendation: lodge the business continuity evidence and consider whether the 2022-23 appointment can be explained as an ordinary family distribution.