CGT and trusts

[stirling]

abc pty ltd atf abc trust

Please correct me if I am wrong. The above is a trust.
It is therefore in theory elligible for 50% cgt discount.
(as opposed to a company which does not get 50% cgt discount)

The trust objectives are written down that the trust is in the business of long term investment in property and rental income.
Due to financial shortfalls the bank have ordered that certain properties be sold and 100% of funds put to reducing a loan. Property holding time 2 years.

"In theory" the trust should be able to claim the 50% cgt discount.

However the ATO look at intention.

Although as property investors we usually have plan a, b ,c, d, e
ie buy and hold, sell, renovate and hold, renovate and sell, subdivide.

the ATO say we are allowed only one thought in our head at one time, and therefore one intention.

Any comments?

 

[TheDoctor]

IMHO, the trust (and thus the recipient of the distributions) should still be elligible for the 50% CGT discount.

 

[Propertunity]

abc pty ltd atf abc trust
Please correct me if I am wrong. The above is a trust.

You are wrong the above is a trustee company abc pty ltd acting as trustee for abc trust. I'm feeling pedantic. OK you want to talk about the trust.

It is therefore in theory elligible for 50% cgt discount.(as opposed to a company which does not get 50% cgt discount)

Not all trusts are eligible for cgt discount. My understanding is that unit holders in unit trusts for instance do not get the discount.
There are unit trusts, discretionary trusts, hybrid trusts, testamentary trusts, bare trusts etc - which one is yours?

However the ATO look at intention.

They do yes. But the intention was documented as long term buy & hold, was it not?

 

[Rob G.]

Not sure of all facts but ...

Are losses preventing a distribution of net income including the net capital gain ?

Or is this a dispute about conducting a "business of trading in assets" where gains are in fact ordinary income so no discount ?

Cheers,

Rob

 

[stirling]

Thanks Propertunity, it is a discretionary trust.

My accountant wants to treat sales as a business asset and property as stock in hand. And hence sales are profit. I would argue with him.

But I have had a brief look at tax cases. ATO can argue if you asked the council about development potential prior to purchase, you had an intention to develop from start etc.

As an aside, the Financial Statement of ABC company contains all the Trust financials and a note in the statement says they are held by the trust. (hence my confusion).

The bank insisted on taking a fixed and floating charge over ABC pty ltd as well as the property security. Total share capital of ABC pty ltd is $1.00 Do they do this in case ABC pty ltd takes on other functions as well as being a trustee, or are they seriously going to sue for $1.

Jim Stirling

 

[JoyBoy]

Stirling,

The trust itself isn't entitled to the CGT discount, it is the beneficiaries that are entitled. If the properties were originally acquired by the trust for long term investment and not for development or resale, and that intention never changed, then upon disposal of the the property by the trust, the beneficiaries would be able to claim the CGT discount. This is assuming of course that the beneficiary is an individual.

The following link shows you how to declare capital gains:

http://www.ato.gov.au/individuals/content.asp?doc=/content/33727.htm

If the trust is in the 'business' of buying and selling property for a profit on the other hand, that's a different story.

 

[Rob G.]

My accountant wants to treat sales as a business asset and property as stock in hand. And hence sales are profit. I would argue with him.

But I have had a brief look at tax cases. ATO can argue if you asked the council about development potential prior to purchase, you had an intention to develop from start etc.

If you are a *business* or a commercial operation then just about any gains on transactions entered into for a profit is "ordinary income". (Myer case)

Acquiring assets with an intention to resell at a profit *might* make the proceeds "ordinary income". (California Copper Syndicate case)

However, if you are deemed a non-commercial operator engaging in a profit making plan involving development and sale of land (i.e. not ordinary income) then it is excludeded from being treated as statutory income under s.15-15 ITAA97. This means only CGT applies.

Seeing as your Accountant has already made an adverse opinion, why not apply for a private ruling ?

Worse that can happen is that the ATO agrees with your Accountant !!

Cheers,

Rob

 

[Harriet]

Hello,

I spoke with my accountant today about this very scenario.

He specialises in family trusts, so I am confident in his response.

He said the trust will be eligible for the 50% discount. When I queried that the property was actually in a company's name, he said it would still qualify for the discount because the company is only "holding" it for the trust.

Hope that helps?

Harriet