Family Trust - minimise CGT

[soyabean]

Hi,
I would appreciate some comments please and thank you in advance.

Selling an IP of a Family Trust, bought for 500 K, will sell for 1.5M , then CGT wil be on 1.5M-500K /2 = 500K.

1./Can we distribute this 500K to beneficiaries who have low income to minimise tax ? We both have reasonable income from normal jobs so no point to distribute to us unless we do something to run a big loss. Not sure what this something is !


2./The thing also for us is we have a lot of relatives overseas, does anyone have knoweledge of or experience in distributing to beneficiaries who are non- Oz living overseas ? I read that they will all be taxed at 30%.

3./Any ideas on how to minimise this tax ?
I know this is a nice problem to have but it is still a proplem. If nothing can be arranged we will pay the tax however it would be nicer if we could.

(I will also seek advice from the accountant and will share what he says. )

Regards,
Soy

 

[redwing]

How long have you held the IP

Are there any other investments in the trust?

You do realise that you are entitled to the 50% CGT discount on any assets held for more than 12 months that you sell at a profit?

 

[whatdoyouwant00]

How long have you held the IP

Are there any other investments in the trust?

You do realise that you are entitled to the 50% CGT discount on any assets held for more than 12 months that you sell at a profit?

They must of been held for more than a year as they have already accounted for the 50% discount by halving the 1M gain.

 

[Terryw]

Trusts don't really get the discount. What happens is the gain is distributed and the recipients get the discount if they are entitled to it. If you distribute to a resident individual and apply the 50% discount that would make their max tax payable to be around 23.5%.

I am not sure if a non resident would be entitled to the discount.

 

[soyabean]

Yes the IP has been in the trust for a while.
If trusts cannot claim the 50% discount, I will gain nothing by distributing to another trust (that is making losses) then ? Therefore I should only distribute to residents ?
Humm !

 

[Terryw]

Your trust has an approx $1mil Capital Gain. My understanding is that this gain could be dstributed to another trust - providing it qualifies as a beneficiariy etc - and this gain can offset a loss, but the 50% discount is not applied until the CG is distributed to a beneficiary that pays tax.

It may still worthwhile distributing to a non resident beneficiary.

Please check with your tax advisor.

 

[Leghorn]

The capital gain will be taxed in the hands of the person to whom you distribute to at their marginal rate. Therefore the level of tax will be payable based on their other income.

 

[soyabean]

Thank you all.

Terry, so what you are saying is:
If :
Trust 1 gains 1M in capital, and Trust 2 runs a 400K loss this year (yes trust 2 is a beneficiary).
I could:
Distribute 400 K to trust 2 to offset that loss.
The 600K left I then can distribute says to 6 tax-payer beneficiaries each 100K. Each can then claim the 50% concession and pay tax on the 50K.

Correct ?
(And I know, this is not an "advice" ).
Thanks.
Soy

 

[Terryw]

Hi Soy

Yes, that is roughly how it works.

 

[btc]

Soy, is your accountant's advice inline with waht is discussed?

Could this scenario be feasible? Say you buy another IP in the same financial year, and put down a 1M deposit (which is a capital loss), then would that mean the trust is capital 'neutral', hence no tax is payable (by beneficiary)?

 

[alexlee]

Say you buy another IP in the same financial year, and put down a 1M deposit (which is a capital loss), then would that mean the trust is capital 'neutral', hence no tax is payable (by beneficiary)?

Why is a 1m deposit on a property a capital loss?

 

[Terryw]

Soy, is your accountant's advice inline with waht is discussed?

Could this scenario be feasible? Say you buy another IP in the same financial year, and put down a 1M deposit (which is a capital loss), then would that mean the trust is capital 'neutral', hence no tax is payable (by beneficiary)?

No, this is not feasible because the $1mil is not an expense that can be claimed in full, but a capital expense which is only claimable in part (2.5% over 40 years usually).

Its the same if you purchased a property for $1mil - you couldn't claim a $1mil deduction.

 

[rikkum]

Thank you all.

Terry, so what you are saying is:
If :
Trust 1 gains 1M in capital, and Trust 2 runs a 400K loss this year (yes trust 2 is a beneficiary).
I could:
Distribute 400 K to trust 2 to offset that loss.
The 600K left I then can distribute says to 6 tax-payer beneficiaries each 100K. Each can then claim the 50% concession and pay tax on the 50K.

Correct ?
(And I know, this is not an "advice" ).
Thanks.
Soy

That would be an example of income injection in which Trust 2 would need to make a family trust election (FTE) which effectively means Trust 2 will only be able to distribute to a family group of a 'specified individual'.

As long as both trusts are yours this is probably not an issue. It it is to prevent trusts going tax loss shopping.

Please make sure you discuss all aspects of making an FTE with your accountant as it is permanent.

 

[Rob G.]

That would be an example of income injection in which Trust 2 would need to make a family trust election (FTE) which effectively means Trust 2 will only be able to distribute to a family group of a 'specified individual'.

As long as both trusts are yours this is probably not an issue. It it is to prevent trusts going tax loss shopping.

Please make sure you discuss all aspects of making an FTE with your accountant as it is permanent.

Sch 2F would not apply if trust 2 had a capital loss. But Part IVA might.

If a revenue loss, trust 2 needs a FTE and trust 1 needs an IEE.

Cheers,

Rob

 

[soyabean]

Thank you all.
I have received formal advice, and yes the advice is very much along the line of what Terry has said.
I have also learned that income loss is counted differently from capital loss. In the example I had where T2 makes a 400K loss, I understand that if the 400K loss was an income loss then I could distribute 800k toT4 leaving only 200K to be distributed to other individual beneficiaries.

Hi Rob, you said:
Sch 2F would not apply if trust 2 had a capital loss. But Part IVA might.
If a revenue loss, trust 2 needs a FTE and trust 1 needs an IEE.

Sorry I don't quite understand.
Whar's Sch2F ?
What's an IEE ?
I understand Part IVA is tax avoidance ? Are you saying that if T2 makes a capital loss and T1 distributes its gain to T2 may be seen as tax avoidance ? In what way ?
Thanks

 

[INXS]

Apart from income tax you have to consider that the people you make the tax distributions to could potentially come looking for there money!!.
Also when distributing to children you have to consider if they want to claim youth allowances, austudy & HECS. Being a beneficiary of a Trust can make this very hard for them. Tax is not the only factor to take in to account with Trust distributions.

 

[soyabean]

Thanks INXS, all being considered.

Capital loss or Income loss ?
Accountant has also just ler me know that the loss in selling the business in T2 (says bought 100K, sold for 40K, agent fee 10 K, pocket only 30 K hence total loss of the sale is 70K), in this example the total 70 K loss, can be classified as income loss not capital loss.

I would have thought that the 70K was capital loss ? Terryw ????

 

[Terryw]

I would have thought it would be a capital loss, but it may depend on your circumstances.

Your trust deed may also allow income to be reclassified as well. Some a capital gain could become income.

You had best talk to your accountant about this, and then get a second opinion by another. There are many good ones on this forum (I am not an accountant).