The income-capital distinction and how it applies to property development

TA 2014/1, recently released by the ATO, is concerned with the topic of trusts mischaracterising property development receipts as capital gains and, in doing so, accessing the 50% discount. It deals with arrangements where property developers use trusts to return the proceeds from development as capital gains instead of income. In essence, the trustee treats the gain as a discounted capital gain which can be distributed to beneficiaries in a unit or discretionary trust. The ATO is concerned that the gains should be returned as ordinary income rather than capital. This article examines the views set out in the taxpayer alert, and considers the possible taxation consequences of those views. The author concludes that the income-capital distinction remains of fundamental importance, and recommends that taxpayers and their advisors be on alert to the potential problems and review all relevant documentation with respect to trusts and property development.