How Charitable Trusts Can Avoid Capital Gains Tax in Australia

When a charitable trust is set up to support a cause, the last thing the trustees want is a hefty capital gains tax (CGT) bill eating into donations, they need to know the rules inside out. Below you’ll learn why CGT applies, which provisions let a trust slip out of the tax net, and five practical steps you can start using today.

What triggers capital gains tax for a trust?

In Australia, any time a trust sells an asset for more than its cost base, the profit is a capital gain. The Australian Taxation Office (ATO) treats that gain just like it would for an individual or company - unless an exemption applies.

Typical assets held by charitable trusts include shares, property, artwork, and investment funds. If the trust decides to liquidate any of these, the ATO will calculate the CGT using the usual formula: sale price - cost base - any eligible discounts or concessions = capital gain. That gain is then added to the trust’s taxable income for the year.

Why charitable trusts enjoy special CGT treatment

The Income Tax Assessment Act 1997 (ITAA 1997) contains a specific provision - Section 30‑10 - that grants a CGT exemption when certain conditions are met. In plain English, the law says:

• The trust must be a ‘charitable institution’ or a ‘public charitable trust’ as defined by the Taxation Administration Act.
• The asset must be used, or intended to be used, for charitable purposes.
• The disposal must be a ‘deemed disposal’ rather than a straightforward market sale in many cases.

If those boxes are ticked, the gain is wiped out - no tax, no paperwork, just a clean profit that stays with the cause.

Key strategies to qualify for the exemption

Below are the most common ways trustees keep CGT off the table.

1. Direct charitable use of the asset - If the trust transfers a property directly to a registered charity for the same use (e.g., a community centre handed over to a local NGO), the transaction is treated as a deemed disposal. The CGT exemption applies because the asset continues to serve a charitable purpose.
2. Distribution of assets to beneficiaries - When a trust distributes an asset to a beneficiary who is also a qualified charitable organization, the distribution is exempt. The ATO treats the asset as if the charity owned it from the start, so no CGT arises.
3. Rollover relief under Subdivision 124‑15 - If the trust sells an asset and immediately reinvests the proceeds into another asset that will be used for charitable purposes, the trust can apply rollover relief. This defers the CGT until the new asset is finally disposed of, giving the trust time to grow its charitable portfolio.
4. Gifting of assets before sale - Donating the asset to a registered charity before any sale means the trust never realizes a capital gain. The charity can then sell the asset and claim its own exemption, or keep it for its mission.
5. Utilising the 50% discount for assets held over 12 months - Even if the above routes aren’t possible, holding an asset for at least a year halves the capital gain. Combine that with the charitable exemption, and many trusts end up with zero tax liability.

Practical checklist for trustees

Before you make any move, run through this short list. It’s designed to catch the most common pitfalls.

• Confirm the trust is registered as a ‘public charitable trust’ with the Australian Charities and Not‑for‑profits Commission (ACNC).
• Verify the asset’s purpose aligns with the trust’s charitable objects - documentation should clearly state the intended use.
• Keep a detailed paper trail of any transfer, distribution, or rollover transaction - the ATO will ask for evidence.
• Check the timing: assets must be held for 12 months to qualify for the discount, and rollover relief must be applied within the same financial year as the sale.
• Consult a qualified tax advisor who specialises in non‑profit tax law. Small errors can turn an exemption into a taxable event.

Comparison of the main CGT‑avoidance routes

Common pitfalls to avoid

Even seasoned trustees slip up. Here are the red flags that can turn an exemption into a tax bill:

• Missing ACNC registration. Without official charity status, the ATO won’t accept the exemption.
• Incorrect valuation of the asset. Over‑ or under‑valuing assets leads to disputes over cost base and discount eligibility.
• Failing to document the charitable purpose. Vague statements (“for community benefit”) won’t hold up; you need a concrete description.
• Timing mismatches. If you sell and then wait months before reinvesting, rollover relief expires.
• Using the trust’s own staff to manage the asset. That can be viewed as a private benefit, negating the exemption.

Real‑world example

Imagine the Melbourne‑based Sunrise Youth Trust holds a portfolio of shares worth $500,000, bought over several years. The board decides to sell the shares to fund a new mentorship program.

Step1 - They check that the program is a registered charitable activity. Step2 - They apply rollover relief: the proceeds are immediately used to purchase a commercial property that will host the mentorship centre. Because the new asset will be used for the same charitable purpose, the ATO allows the CGT to be deferred.

Result: the trust continues its work without a $150,000 CGT hit (assuming a 30% rate on $500,000). The deferred gain will only become relevant if the property is sold in the future and the trust no longer uses it for charitable work.

Next steps for your trust

1. Review the trust deed to confirm it explicitly allows charitable distributions and asset acquisitions.

2. Conduct a tax health check - list all assets, acquisition dates, and current purpose.

3. Map each asset against the five strategies above and note which route is most viable.

4. Draft a brief report for the board that outlines the chosen approach, required documentation, and timeline.

5. Schedule a meeting with a tax adviser who specialises in charities to lock in the exemption before any sale occurs.

Frequently Asked Questions