Q for expats receiving family trust distributions

[babushka]

Situation is that we have a family trust (HDT) which owns some investment properties in Australia.

Trust does not have any borrowing to buy these properties, instead hubby borrowed the money to buy the units in the trust. When hubby was working in Australia, income from trust was distributed to him, and this was offset against the interest on the loans he borrowed to buy the units in the trust.

Now he is working overseas, income from trust still gets distruted to him as normal, but trust has to pay around 30% of the income to ATO as withholding tax to non-residents. He then declares the trust income on his tax return, and gets back the tax paid by the trust (like franking credits) - in theory. This is where it may get complicated. Since hubby still has the loans in his name and the interest expense on these loans are normally "greater" than the distributed income from the trust, how does hubby apply for the tax refund (the 30% paid by the trust to non-residents) - since his income will be negative (ie a loss)?

Does the above mean that the losses will have to be carried forward, and hubby may never be able to use them?

What strategies should we consider? Sell all trust properties? Transfer some into our names? Would appreciate a good debate on this!

 

[Terry_w]

I take it he is a no resident for tax purposes as well. This would mean higher tax rates if there was a positive income.

As he has a negative Income the loss would be carried forward and any future income would be offset by the loss. If the trust had borrowed it would be in a similar position too. It may be possible to convert the trust to a fixed unit or discretionary trust. But this may not change much in the short term and may be costly to implement and difficult _.- need to re do the loans etc. You should seek some advice as it will depend on your family situation.

 

[babushka]

I take it he is a no resident for tax purposes as well. This would mean higher tax rates if there was a positive income.

As he has a negative Income the loss would be carried forward and any future income would be offset by the loss. If the trust had borrowed it would be in a similar position too. It may be possible to convert the trust to a fixed unit or discretionary trust. But this may not change much in the short term and may be costly to implement and difficult _.- need to re do the loans etc. You should seek some advice as it will depend on your family situation.

Thanks, Terry, for your replies.

Yes, hubby is a non-resident for tax purposes. Yes, there is no threshold for non-residents, and non-residents are taxed on the first $ from around 30% upward.

Yes, his Australian-sourced income will very likely to be negative (because interest expenses will be "higher" than any distributed trust income. However, we have to find $ to pay for trust's withholding tax amount on the distributed income (about 30% of the income distributed). And, if hubby cannot get a refund on this to make the cash flow neutral, then we will "up the creek". We will ask for advice, but thought if we could get some views first to consider our position. It is no use for us to accumulate losses when we have no Australian income to offset now or in the future!

 

[Terry_w]

Have you considered selling?

What state is the property located in?

 

[babushka]

Have you considered selling?

What state is the property located in?

Properties are in NSW, Vic and Qld. Yes, selling is one option. Another one will be asking bank to transfer loans from hubby's name to trust's name so that the interest expense will be offset against trust rental income before distribution. Not sure if this will cause any problem?

 

[Terry_w]

Properties are in NSW, Vic and Qld. Yes, selling is one option. Another one will be asking bank to transfer loans from hubby's name to trust's name so that the interest expense will be offset against trust rental income before distribution. Not sure if this will cause any problem?

Seek advice because it is not that simple. Husband has borrowed to buy the units. Changing names on loans could in no interest being deductible. The trust woukd have to borrow to redeem the units or husband could sell them to a discretionary trust which would borrow to buy them. Look out for stamp duty and cgt.

 

[babushka]

Seek advice because it is not that simple. Husband has borrowed to buy the units. Changing names on loans could in no interest being deductible. The trust woukd have to borrow to redeem the units or husband could sell them to a discretionary trust which would borrow to buy them. Look out for stamp duty and cgt.

Thanks, Terry.
I did suspect that changing loans from hubby to trust might trigger some of the above. Simpler options may be just to sell everything!!! - in this market???

The main question is whether hubby can apply for a refund from ATO on the amount of tax paid by the trust on distributed income. Hubby will likely to have a negative income (ie loss to be carried forward) as a non-resident. So, can he apply to ATO for a refund of tax paid by trust, as he will not be paying any tax on his personal return? This is similar to a resident who is below the tax threshold, and can apply to ATO for a refund of the franking credits on shares.

 

[Terry_w]

I am in japan atm and using a pbone to reply so cannot easily look into things. I beleive there are special rules for losses and cgt for non residents and am not sure how it would work.

If husband has a loss from the ownership of the units and the trust has witbheld some of his tax on his income then he may get a refund when he does his tax return and the loss reduces the income.

Selling 3 properties is fairly drastic. You may be able to spread it over 2 financial to possibly reduce cgt. Buf this will depend on a lot.

 

[Terry_w]

And in vic you may be able to transfer a property to a beneficiary or possibly amotjer trust without stamp duty.

In nsw stamp duty would be payable probably but if u wait until july 1 then it may be possible to transfer the units without stamp duty. Not sure about qld.

 

[babushka]

I am in japan atm and using a pbone to reply so cannot easily look into things. I beleive there are special rules for losses and cgt for non residents and am not sure how it would work.

If husband has a loss from the ownership of the units and the trust has witbheld some of his tax on his income then he may get a refund when he does his tax return and the loss reduces the income.

Selling 3 properties is fairly drastic. You may be able to spread it over 2 financial to possibly reduce cgt. Buf this will depend on a lot.

Ha! I did not think you are in Australia - it would be 1am there!

I did read somewhere that if the tax payable by the non-resident beneficiary is less than that paid by the trustee, then the non-resident beneficiary is entitled, upon application to the ATO, for a refund of the excess. Does this mean, if hubby's tax return shows his income is negative then no tax will be payable, and he can apply to the ATO for a refund of the whole amount of tax paid by trustee?

On the CGT front, the government has changed the rules to make CGT payable fully by non-residents (ie no more 50% reduction!)

 

[Terry_w]

I think in your situation the trustee has only withheld the tax that your husband would have to pay. The trustee hasnt sctually paid it himself. Its lime an employer taking tax out of a wsge and sending it to the ato

 

[babushka]

I think in your situation the trustee has only withheld the tax that your husband would have to pay. The trustee hasnt sctually paid it himself. Its lime an employer taking tax out of a wsge and sending it to the ato

Not sure how it is going to work. Trust and personal tax returns have just been lodged. They said trust would have to pay $xxx to ATO, and hubby would get a refund of $yyy. This year was different because hubby had salary in Australia (worked there part of the tax year). But, next year it is going to be different, he will have no salary in Australia (only distributed trust income and large interest expense on all the loans! -hence net income will be negative).

 

[Terry_w]

The trust would generally only pay tax if no distribution was made. And it would be at the top tax rate too.