In short

Tax-deferred distributions from managed funds and REITs, common because of building allowance and depreciation deductions at the trust level, aren't taxed as income when received, but instead reduce your unit cost base under CGT event E4 (or the AMIT equivalent, E10). Once the cost base reaches zero, further tax-deferred distributions become immediate assessable capital gains, and any eventual sale is calculated against the reduced, not original, cost base.

For Australian retirees who hold managed funds, Real Estate Investment Trusts (REITs), infrastructure trusts, or other unit trust investments outside superannuation, the tax-deferred distributions these investments commonly pay are subject to a specific and frequently-overlooked CGT mechanism: CGT event E4 under section 104-70 of the Income Tax Assessment Act 1997. Tax-deferred distributions are amounts paid by a trust that are not assessable as income to the unitholder — typically because they represent return of capital, building allowance deductions flowing through from the trust's property holdings, depreciation passed through from depreciable assets, indexation on the trust's own capital gains, or accounting differences in income. The unitholder receives the cash without immediate tax. But the distribution doesn't escape tax altogether: CGT event E4 reduces the unitholder's cost base in the units by the amount of the tax-deferred distribution. Over years of holding, the cost base steadily erodes; when it reaches zero, further tax-deferred distributions become immediate capital gains in the year of receipt — the tax that was "deferred" has now arrived. For long-term retiree investors in REITs and infrastructure trusts — where tax-deferred amounts are a major component of cash distributions — this can be a significant and surprising tax event that should be planned for, not discovered.

The tax-deferred distribution mechanism at the trust level is the source of the issue. When a unit trust pays a distribution to its unitholders, the distribution typically has multiple components reflected on the trust's annual tax statement: assessable income components (interest, rental income, dividends earned by the trust); tax-deferred amounts (cash received by the unitholder that is not assessable income because it represents economic items that have tax shelter at the trust level — for instance, building allowance deductions on the trust's property holdings, which produce cash flow but no taxable income); tax-free amounts in some specific cases; and capital gains the trust has realised during the year. The tax-deferred component is the focus of E4. For property and infrastructure trusts — where the underlying assets generate substantial depreciation, building allowance, and capital works deductions — the tax-deferred component can be large relative to the cash distribution. A REIT may distribute 5% per year of which 2% is tax-deferred — meaning around 40% of the cash distribution is reducing the unitholder's cost base rather than being assessed as income.

The CGT event E4 mechanism is straightforward in concept. When a trust pays a non-assessable amount to a unitholder, the unitholder's cost base in the unit is reduced by the amount of the non-assessable distribution. While the cost base remains positive, the tax-deferred distribution is received without immediate tax — it is just a cost base reduction. The unitholder must track this reduction over time. Capital gain components of trust distributions don't reduce cost base under E4 — those are assessed directly under standard CGT rules. The annual tax statement from the trust shows the breakdown of the distribution into its components, and the unitholder (or their tax preparer) uses this to maintain the running reduced cost base. The mechanism is essentially a deferral: the tax-deferred amount is received free of immediate tax, but the eventual capital gain on disposal will be calculated against the reduced cost base — producing a larger gain than would have applied with the original cost base.

The AMIT regime is the critical refinement that retirees and advisers commonly miss. From income years beginning on or after 1 July 2016 (and optionally from 1 July 2015), Australia introduced a separate "attribution managed investment trust" tax regime, and most large registered MITs — including the major listed REITs, listed infrastructure trusts, and many wholesale and retail managed funds — elected in. For an AMIT, CGT event E4 does not apply. Instead, an "AMIT cost base net amount" is calculated each year and reported on the unitholder's AMMA statement (Attribution MIT Member Annual). The net amount is two-sided: the cost base is increased by amounts of assessable income and non-assessable non-exempt amounts attributed from the trust, and decreased by actual cash distributions and any attached tax offsets. Once the cost base is reduced to nil, any remaining net-down amount triggers CGT event E10 and produces an immediate capital gain — the AMIT analogue of E4's cost-base-zero trigger. For practical advice work, the first step on any client's trust holding is therefore to look at the annual statement: if it is an AMMA, the AMIT regime and E10 apply; if it is a standard distribution statement, E4 still applies. The economic effect — cost base reductions over time, immediate gains when the base hits zero — is the same in shape, but the AMIT mechanics can also produce cost base increases in years where attribution exceeds cash, which the legacy E4 framework cannot.

The cost-base-zero trigger is where the deferral ends and tax becomes immediate. Once the cumulative cost base reductions equal the original cost base, the cost base reaches zero. Any further tax-deferred distribution then generates an immediate capital gain in the year of receipt — equal to the tax-deferred amount (or the excess AMIT cost base net amount, for AMIT units). The capital gain is eligible for the 50% CGT discount assuming the units have been held for at least 12 months, which is generally the case for long-term holders. The cost base then remains at zero, and the next year's tax-deferred component similarly becomes an immediate capital gain. The pattern continues for as long as the unitholder holds the units. For a retiree who has been receiving REIT distributions for 15-20 years, the cost-base-zero point may be near or already past, depending on the original cost base, the holding period, and the typical tax-deferred component of the trust's distributions.

The disposal scenario is where the cumulative cost base reduction becomes most visible. When a retiree eventually sells their trust units, the capital gain on sale is calculated as sale proceeds minus the reduced cost base — not minus the original acquisition cost. For a long-held unit with substantial cumulative tax-deferred distributions, the gain on sale is therefore larger than the simple acquisition-to-sale arithmetic would suggest. Take a retiree who bought REIT units for $50,000 in 2010, and over 15 years has had approximately $25,000 of tax-deferred distributions applied to cost base — leaving a reduced cost base of $25,000. If the retiree now sells for $80,000, the capital gain is $55,000 (sale $80,000 minus reduced cost base $25,000) rather than the $30,000 the headline arithmetic would imply. After the 50% CGT discount, the assessable gain is $27,500 — taxed at the retiree's marginal rate. Where the units sit in an AMIT, the same outcome arises through the AMMA-recorded cost base adjustments, with any net cost base increases over the years going the other way.

The tracking responsibility falls on the unitholder (or their tax preparer). Each year, the trust's statement — standard distribution statement for non-AMIT trusts, AMMA for AMIT trusts — shows the components or the AMIT cost base net amount. The unitholder needs to maintain a running record of cumulative cost base adjustments to know the current reduced cost base. For long-held units across multiple trusts, the tracking can become substantial: each trust has its own annual statement; each unit holding has its own cost base history; and the cumulative reduction may extend back many years. The records should be retained for at least the period required for ATO purposes — typically the holding period plus the amendment period after disposal. Lost records can make the cost base reconstruction difficult, and the ATO can challenge cost base claims that are not supported by documentation. For retirees with complex investment portfolios, cost base tracking is a meaningful administrative task that should be done annually rather than reconstructed at disposal.

The retiree-specific considerations make this issue particularly relevant to older clients. Retirees often hold trust investments for decades — the cumulative cost base reduction is therefore substantial. REITs and infrastructure trusts are commonly chosen by retirees for their distribution yield — the very characteristic that makes them attractive (steady cash distributions) is what creates the E4 / E10 issue. Lower retirement marginal rates do not eliminate the tax — the capital gain (whether from cost-base-zero or on sale) is still taxable, just at the retiree's lower rate. For trust units held within super in pension phase, the pension earnings exemption shelters the gain — but cost base tracking still matters for any future change in circumstances (commutation back to accumulation, breach of the transfer balance cap). For trust units held personally outside super, the gain is fully assessable on disposal.

The strategic responses depend on the client's specific position. Track the cost base annually — do not lose the running record. Forecast cost-base-zero based on the trust's typical distribution pattern — for a trust with $1,000 a year of tax-deferred distributions and a current reduced cost base of $5,000, the zero point is approximately five years away. Plan disposal timing — selling before cost-base-zero allows the gain to be calculated against the existing cost base; holding past it creates ongoing annual capital gains as distributions continue. Coordinate with retirement income — triggering a capital gain in a year of low other income uses the CGT discount efficiently at lower marginal rates. Transfer to super pension phase where appropriate — moving units into an SMSF or retail super in pension phase shelters future distributions, subject to TBC and contribution cap considerations, and noting that the transfer itself is a CGT event. Sell before zero or accept the ongoing gains — there is no perfect answer, but the choice should be deliberate rather than discovered.

What do worked planning examples show?

These two cases show how E4 / E10 applies in practice. Illustrative only — not personal advice — using FY25-26 figures.

Case 1 — Helen, 72, holds 50,000 units in a major Australian listed REIT, bought in 2008 for $200,000. The REIT has paid steady distributions over the years — approximately 7% per year on the original investment, of which approximately 30% has been tax-deferred or (post-2016) recorded as a net-down on her AMMA statement. Cumulative cost base reductions over 17 years: approximately $74,000. Current units value: approximately $260,000. On these facts Helen's reduced cost base is approximately $200,000 − $74,000 = $126,000. She has not yet reached cost-base-zero, but she is about 60% of the way there. If she continues to hold for another 10 years, the cost base will likely reach zero, and on the AMIT side any future net-down amount above zero would trigger CGT event E10 with an immediate gain. If she sells now for $260,000, the capital gain is $134,000 ($260,000 − $126,000), with the 50% CGT discount producing $67,000 assessable — taxed at her retirement marginal rate. On these facts the rational steps are to be explicit about the cost-base position rather than relying on the original $200,000; track it annually using the AMMA statement; consider whether to dispose at a tax-efficient time. If she has the CGT cap or NCC headroom and wants the future distributions sheltered, an in-specie transfer into a super pension is one route — the transfer is itself a CGT event but produces a clean reset of the cost base inside super. Don't simply hold forever without thinking about it — the cost base will continue to erode and future distributions will eventually become assessable.

Case 2 — Geoff, 80, holds units in a non-AMIT property unit trust bought in 1995 for $30,000. Over 30 years he has received steady distributions; the cumulative tax-deferred component is approximately $35,000 — exceeding the original cost base. His cost base reached zero approximately 5 years ago. He has been receiving approximately $1,500 per year in tax-deferred distributions since then. On these facts each post-zero year's tax-deferred distribution is an immediate capital gain under CGT event E4, eligible for the 50% CGT discount — so $1,500 produces about $750 of assessable gain a year, taxed at Geoff's marginal rate. If his tax preparer hasn't been catching them, his returns for those years are incorrect. On these facts the rational steps are to review the last few years' returns (typically the standard 2-year amendment period for an individual with non-complex affairs), file amended returns to correct any years still within the window, report the gain in the current year's return, and consider whether to dispose of the units — if Geoff doesn't need the ongoing distribution and the units have appreciated, selling allows one final controlled tax event rather than ongoing annual gains. The general point is that cost-base tracking matters; missing the cost-base-zero point is a real tax compliance issue that compounds quietly year after year.

For retirees with managed fund, REIT, or infrastructure trust holdings outside super, CGT event E4 (or its AMIT equivalent, E10) is one of those technical features of the tax system that quietly accumulates impact over years of holding. The advice work is to identify these holdings in every retiree client's portfolio, confirm whether each trust is AMIT or non-AMIT (look at the annual statement format), reconstruct the cumulative cost base adjustments from acquisition to date, track the running reduced cost base annually, forecast when cost-base-zero will be reached and flag it to the client in advance, plan disposal or transfer timing to manage the eventual capital gain, and coordinate with the tax preparer to ensure cost base records are accurate and amended returns are filed where past-year errors have occurred. The mechanism does not make these investments unsuitable for retirees — they remain valuable income vehicles — but it does require active management of the cost base position to avoid surprises at disposal or after cost-base-zero is reached.

Sources

Key takeaways

  • Tax-deferred distributions from a trust reduce your unit cost base under CGT event E4, rather than being taxed as income when received.
  • For AMIT trusts (most large listed REITs and managed funds), the mechanics run through an 'AMIT cost base net amount' on the AMMA statement instead of E4, but the effect is similar.
  • Once the cost base reaches zero, further tax-deferred distributions trigger an immediate capital gain each year (CGT event E10 for AMITs), rather than continuing to be tax-deferred.
  • When you eventually sell trust units, the capital gain is calculated against the reduced cost base, not the original purchase price, often producing a much larger gain than expected.
  • Cost base tracking is the unitholder's responsibility, using the annual trust statement each year — losing this record makes reconstructing the cost base difficult and can leave the ATO challenging unsupported claims.

Frequently asked questions

Why don't I pay tax on the tax-deferred part of my REIT or managed fund distribution?

Because it's not treated as assessable income at all — instead, it reduces your cost base in the units under CGT event E4 (or the AMIT cost base adjustment for most large listed trusts). The tax isn't avoided, just deferred until you sell the units or your cost base reaches zero.

What happens when my managed fund or REIT units' cost base reaches zero?

Any further tax-deferred distribution then becomes an immediate capital gain in the year you receive it, rather than simply reducing your cost base further. This gain is generally eligible for the 50% CGT discount if you've held the units for over 12 months, but it's still an assessable event you need to report.

Why is the capital gain when I sell my REIT units bigger than I expected?

Because the gain is calculated against your reduced cost base — the original purchase price minus all the cumulative tax-deferred distributions you've received over the years — not the amount you originally paid. For long-held units in a high-tax-deferred trust, this can make the taxable gain substantially larger than a simple sale-price-minus-purchase-price calculation would suggest.

How do I know if my trust investment is an AMIT or uses the older CGT event E4 rules?

Check the annual tax statement your trust sends you. If it's called an AMMA (Attribution MIT Member Annual statement), the trust is an AMIT and the AMIT cost base adjustment and CGT event E10 rules apply. If it's a standard distribution statement, the older CGT event E4 rules apply instead.

A note on advice. This article is general information only and doesn't account for your personal circumstances. Everyone's situation is different — before acting, it's worth talking it through with a licensed adviser who knows your full picture.