Family Trust accounting question

[Harriet]

Hello,

My husband and I own three properties in a Family Trust.

The trust itself turns a small profit ($18K), but the properties themselves are negatively geared (because of interest paid on them by us outside the trust).

A few questions:

1) Can we distribute the trust's profits to family members in this scenario? (This was one of the main reasons we decided to buy in a trust in the first place, but have never distributed funds to anyone but ourselves.)

2) Is there any tax advantage in doing this?

Cheers.

 

[Aaron_C]

You can't negative gear with a family trust unless the family trust has other business income which offsets against the negative gearing losses. Do you run a business through the family trust too?

 

[Harriet]

Erm . . . no, there's no other business we run through the Trust; only the properties.

 

[Aaron_C]

So....how is that the properties are overall negatively geared but your trust turns an 18k profit? With a unit trust you can do that but not with a family (aka discretionary) trust.

 

[Harriet]

It's a hybrid discretionary trust . . . sorry, should have been more specific at the outset.

 

[Aaron_C]

It's a hybrid discretionary trust . . . sorry, should have been more specific at the outset.

Ah that makes more sense

Yes you can distribute to family members as long as they are listed as beneficiaries in your trust deed. Just be wary of distributing to children under 18 because they get taxed at penalty rates (66%!!) if they receive income that they did not work for. Your accountant would be able to give you more specific advice on how you should distribute it to save tax. One common way is to have a Pty Ltd company as a beneficiary to distribute the excess profits to - so all you cap your tax rate at 30%.

 

[Harriet]

Thanks!

How difficult/expensive is it to add beneficiaries to the trust deed?

The trustee is a company. Can we distribute to this company?

Also, the loans for the properties are in the names of me and my husband - 50/50. If funds from the trust are distributed to beneficiaries other than my husband and me , can we still claim ALL of the interest paid on these properties on our personal tax returns?

Sorry for all the questions!

Cheers.

 

[Peter_Tersteeg]

How difficult/expensive is it to add beneficiaries to the trust deed?

The trustee is a company. Can we distribute to this company?

Your trust deed should have some contingencies for family members to be beneficiaries. This will often include future spouces and unborn children.

Another cagetory of beneficiary may also list the trustee company and perhaps any associated companies.

All these things will depend on the wording of the trust deed. You may be able amend the trust deed, but this will also depend on the wording. You need to speak with the accountant and solicitor who organised the trust deed for you.

Also, the loans for the properties are in the names of me and my husband - 50/50. If funds from the trust are distributed to beneficiaries other than my husband and me , can we still claim ALL of the interest paid on these properties on our personal tax returns?

Again, it will depend on the wording of the trust deed. You'll need to consult your accountant to be clear on this part especially. This is one of the things the ATO has flagged as a potential problem with hybrid trusts. You really do not want to rely on general advice or your own interpretation for this part.

 

[Rob G.]

So ... do I get this right ?

You have borrowed to purchase units in a HDT.

Those funds have been used by the trustee to purchase IP's in the trust.

Rental is the only source of income in the trust.

And you have just received advice that you can distribute that rental income to beneficiaries other than the unit holders.

Is that correct ?

If so, I hope you get advice about claiming tax deductions in your personal tax returns for interest expense on purchasing the units.

Cheers,

Rob

 

[Harriet]

Hiya Rob G,

That's all correct apart from the bit about "just receiving" the advice.

We haven't received that advice. I guess that was the gist of my original question, though.

Are you saying that it is not possible to distribute rental income to anyone other than the unit holders?

Cheers and thanks.

H.

 

[Rob G.]

Probably the best starting point is taxpayer alert TA2008/3.

A better read than boring you with details of tax and trust law.

Cheers,

Rob

 

[Harriet]

Well, that explains why we have never distributed to anyone other than ourselves, and why we won't until the loans for the properties are paid off.

Therein ends this thread . . .

Cheers.