CGT, non cap losses and trusts

[quiggles]

This is one that I will take to my accountant, but I was hoping someone could give me the basics (all disclaimers deemed given and understood):

My trust is selling a property and will make a capital gain. Let us say (for the sake of round figures) the gain is $100,000

My trust it's discretionary, not hybrid, has carried forward losses (not capital losses) of (let's say) $25,000.

We will need to distribute income at the end of the financial year. What are the steps we go through, and how does the loss affect the taxable gain? We have a low earner, a high earner and a child that we can distribute to.

My intent in asking this is to then apply it to my situation AND THEN SEEK PROFESSIONAL ADVICE. I want to be able to ask him better questions, is all.

 

[GreatPig]

Quiggles,

I'm by no means an expert, but by my understanding, the income loss will not be able to offset the capital gain at all. And whether the loss can be carried forward I think depends on whether or not the trust has made a family trust election.

When you say "distribute income", are you referring to just the capital gain or other income profits in excess of the carry-forward loss (assuming you can use it)?

Regarding the distributions, minors under 18 can only receive $772 before being taxed at the penal rate of 66%. To me, the distributions would best go in the first instance to anyone with a personal loss that can be offset (capital loss in the case of the capital gain), and then to the lowest income earner (after the $772 to the minor). If the complete distribution makes the low income earner the highest income earner, then if both are on the top marginal rate it doesn't matter who gets it. If not, then apportion the distribution so as to minimize the overall tax.

Again, I'm no expert. Just a few thoughts.

Cheers,
GP

 

[Bushy]

Hi Quiggles
I might be wrong but I would think you would work out your CGT
ie 100k x50% if held over 1 yr equals 50k taxable gain then subtract losses of 25k . your distribution from trust would be 25k to lowest income earner/s
Regards Bushy

 

[quiggles]

I'm certainly hoping that's the case, but someone told me today that the losses had to be taken off the cap gain before halving it, not after.

 

[Apocalypse]

I'm certainly hoping that's the case, but someone told me today that the losses had to be taken off the cap gain before halving it, not after.

I believe that's right. 100k - 25k = 75k

50% discount if applicable = 37.5k

Then distribute as best suits...

 

[Mry]

I believe that's right. 100k - 25k = 75k

50% discount if applicable = 37.5k

Then distribute as best suits...

Yep, that's right.

As for distribution after that, kids get only a little bit, and then the rest goes to individuals taking full advantage of low income thresholds.

 

[GreatPig]

Since when can you offset an income loss against a capital gain?

GP

 

[Apocalypse]

Since when can you offset an income loss against a capital gain?

GP

Capital gains is income too. Only proviso is can't offset capital loss against income - for fairly obvious reasons...

 

[Mry]

Since when can you offset an income loss against a capital gain?

GP

Since Capital Gains formed part of a taxable income and and income losses can reduce that taxable income.

 

[Terryw]

Mry

Are you sure that would be possible with a trust?

I was under the impression, like Great Pig, that CGs were a different stream to income, and one could not offset the other before distribution. (but I am not an accountant)

Regards

Terryw

 

[skater]

I am not an accountant, & can't ask my accountant for another week as he is on holiday, but the way I have been led to believe is that you take your loss off of the capital gain, then deduct 50% (if applicable), then distribute. I

 

[Mry]

Thanks Terryw, I'm eating humble pie. I did some checking and would like to amend my previous statements. Teaches me for being quick.

Tax Losses cannot reduce a capital gain in a trust. As Terryw mentioned, the trust distributes types of income such as Primary Production Income, Non Primary Production Income, Capital Gains and Attributable Foreign Income. Tax losses within a trust can only reduce Primary Production or Non Primary Production income, depending on the type of loss it is (PP or NPP).

An individual can reduce a capital gain in their own name through a taxable loss. But a trust cannot distribute losses, capital or taxable, only profits (another reason why HDTs, IPs and negative gearing make a great combination), so the capital gain goes through unchanged.

Soooo.... if the capital gain is all there is, and it is discountable, the trust will be giving the beneficiary a net capital gain of $50,000 and advising that it is discounted. The beneficiary will account for the capital gain in their own name, or names.

Also, I would note that unless your discretionary trust has made a family trust election, your carry forward tax losses would be flushed down the toilet.

 

[GreatPig]

Mry,

An individual can reduce a capital gain in their own name through a taxable loss.

Where applicable, would the 50% CGT concession be applied before deducting the income loss or afterwards?

For example, if I had a $100K capital gain (50% concession applicable) and a $50K income loss, would the final taxable income (ignoring other deductions) be zero or $25K?

GP

 

[Mry]

In that situation for an individual, zero.

 

[ggumpshots]

Thanks Terryw, I'm eating humble pie. I did some checking and would like to amend my previous statements. Teaches me for being quick.

Tax Losses cannot reduce a capital gain in a trust. As Terryw mentioned, the trust distributes types of income such as Primary Production Income, Non Primary Production Income, Capital Gains and Attributable Foreign Income. Tax losses within a trust can only reduce Primary Production or Non Primary Production income, depending on the type of loss it is (PP or NPP).

An individual can reduce a capital gain in their own name through a taxable loss. But a trust cannot distribute losses, capital or taxable, only profits (another reason why HDTs, IPs and negative gearing make a great combination), so the capital gain goes through unchanged.

Soooo.... if the capital gain is all there is, and it is discountable, the trust will be giving the beneficiary a net capital gain of $50,000 and advising that it is discounted. The beneficiary will account for the capital gain in their own name, or names.

Also, I would note that unless your discretionary trust has made a family tax election, your carry forward tax losses would be flushed down the toilet.

What figure is required to initiate a family trust election

 

[kmranu]

What do you think about this situation?
Is it possible to deduct interests on loans from captail gain? For instance, a trust borrows money for investment and make a capital gain. Can the trust use capital gain to pay interest owing before distributing to the beneficiaries?