Trusts and Distriubuting Captial Gains Tax Free?

Trusts and Distriubuting Captial Gains - Tax Free?

Kevin Munro & Associates (www.taxlegal.com.au) free downladable report ‘Trusts and Tax Planning’ (http://www.taxlegal.com.au/publications/Trust and Tax Planning.pdf) talks about the practice where a discretionary trust revalues its asset(s) and makes a capital distribution of the asset revaluation reserve to one or more beneficiaries.

Briefly the process involves:

1. Revalue the asset
2. Trustee makes a revaluation of capital to a beneficiary (if the deed allows capital distribution)
3. But as the trust probably does not have the cash to pay the distribution it opens a credit loan account in favour of the beneficiary
4. Later when the trust has funds, instead of making a (taxable) distribution to beneficiaries, it first directs funds to repayment of the credit loan account which is not taxable to either the beneficiary or the trustee as it is a repayment of loan principal.
5. The fact that the loan is non-interest baring is, according to the report, not affect it’s status as a debt

Does this mean what I think - you have your IP revalued and create a loan account in favour of a beneficiary for the value of the capital gain and then down the track when the trust becomes positively geared (or even if it is already) and the trust comes to make a distribution, it first debits the loan account repaying the loan account and thus makes a tax free payment to the beneficiary concerned?
 
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Hi Simon

It does indeed. Moreover, because the trust owes you money, it can go to the bank and replace the loan from you with a loan from a bank. This means that the trust can claim interest as a tax deduction on this refinancing even the funds are given to you for you to use for whatever you like - even if you use the funds for completely personal purposes!

Have fun

Dale
 
Thanks Dale!

I gather then that you would do this if you had an IP increase in value and you wanted to take that increase as cash flow rather than use it within the trust as equity to fund another purchase?

In your experience, how often are people taking an increase in equity out of a trust in this way rather than "holding" it in the trust and using it as equirty to fund a further purchase?

Cheers, Simon

PS: This discussion is a positive in favour of capital gains over yield, isn't it?
 
Hi Simon!

I see a mixture of people doing both. Often, it is after a few years when the growth has accumulated that the benefits of doing these things can be considered and especially as part of the retirement planning where you can effectively live tax free for the rest of your life . . .

Yes, there are a number of reasons why capital growth is more important than cashflow, just as, there are compelling reasons why cashflow can be more advantageous to some people than capital growth. Horses for courses.

Dale
 
Just wondering how far this can be pushed,

Could you use a hybrid trust, purchase a high gain (typically low yield) property, then negative gear against the low yield and take the capital tax free as discussed?

Regards
Kim
 
Now if I have this right?

You pay aprox $2000 to set up a trust and management company.

You gift X amount to the trust and for my example the trust buys shares.

Every year before tax time the trustee values the porfolio and decides to set up the capital distribution loan based on the capital gain for the year and use that loan to pay the benificiary before profits are distributed?

How much would the trust/company be up for in yearly compliance costs?

Could you be paid back the gifted amount as a capital distribution?

If you placed a fully paid PPOR into the trust for asset protection would you need to charge market rent or could you just cover holding costs? It would be some time down the track and an inherited asset so stamps ect would have to be paid anyway on it. Should the will note the trust as a benificary or do I just ask my lawyer to do the transfer when the time comes?

Would the PPOR need to be revalued every time the market value of the shares are calculated?

Would buying a small office to run the existing business be a similar rent and valuation position to the PPOR?

Could you hold the distribution of capital in the capital repayment loan and draw it down as required or just after the yearly revaluation?

What would be a minimum gift to start the ball rolling? And any minimum aditional gifts?

How soon before the ATO shuts the door on this?

Have I missed something:confused:

bundy
 
Hi

I cannot see any reason why not . . .


Dale


Originally posted by kheaver
Just wondering how far this can be pushed,

Could you use a hybrid trust, purchase a high gain (typically low yield) property, then negative gear against the low yield and take the capital tax free as discussed?

Regards
Kim
 
Hi

Basically, yes, you have this right.

The annual compliance costs will vary depending upon the quality of your records, the complexity of issues facing you and your accountant, and, how much your accountant charges on an hourly basis.

There is no indication at all that the tax office are concerned by the options available. At this stage, at least . . .

Dale



Originally posted by bundy1964
Now if I have this right?

You pay aprox $2000 to set up a trust and management company.

You gift X amount to the trust and for my example the trust buys shares.

Every year before tax time the trustee values the porfolio and decides to set up the capital distribution loan based on the capital gain for the year and use that loan to pay the benificiary before profits are distributed?

How much would the trust/company be up for in yearly compliance costs?

Could you be paid back the gifted amount as a capital distribution?

If you placed a fully paid PPOR into the trust for asset protection would you need to charge market rent or could you just cover holding costs? It would be some time down the track and an inherited asset so stamps ect would have to be paid anyway on it. Should the will note the trust as a benificary or do I just ask my lawyer to do the transfer when the time comes?

Would the PPOR need to be revalued every time the market value of the shares are calculated?

Would buying a small office to run the existing business be a similar rent and valuation position to the PPOR?

Could you hold the distribution of capital in the capital repayment loan and draw it down as required or just after the yearly revaluation?

What would be a minimum gift to start the ball rolling? And any minimum aditional gifts?

How soon before the ATO shuts the door on this?

Have I missed something:confused:

bundy
 
Originally posted by DaleGG
Hi

Basically, yes, you have this right.

The annual compliance costs will vary depending upon the quality of your records, the complexity of issues facing you and your accountant, and, how much your accountant charges on an hourly basis.

There is no indication at all that the tax office are concerned by the options available. At this stage, at least . . .

Dale

Thanks Dale

I think the set up may be more than my present accountant can handle, he may be able to do the ongoing paperwork.

I guess my next moves are to read all of tax legal and wait for your book to arive in Adelaide next month.

I will also light a fire under my mate with the hall to see if Tuesday nights are ok to use:rolleyes:

bundy
 
I found a couple of interesting passages in the report to the treasurer from the Board of Taxation on the taxing of trusts.

37 Beneficiaries of discretionary trusts are not taxed on capital distributions or distributions sourced from unrealised capital gains. These features are all consistent with an integrated tax approach, because individuals are not taxed on unrealised gains. However, losses cannot be distributed to the beneficiaries and instead must be offset against the future income of the trust

65 The Board has also considered examples of practices which, while within the law, lead to tax advantages. These examples revolve around the distribution of unrealised gains on revaluation of trust assets.
66 The Board considered these to be limited examples that do not question its general conclusion in Recommendation 1. The Board was also concerned that any attempt to remove these tax advantages for classes of trusts delineated either by size, type or complexity, carries risks of being arbitrary and unfair.
67 The Board noted that the Commissioner of Taxation is continuing to monitor this area and that he will report directly to the Government on any need to improve integrity.



I really like the boards attitude of "move along, there's nothing to see here"

For anyone interested in the full report the link is
http://www.taxboard.gov.au/content/trusts/index.asp

Regards,
Kim
 
B

brains

Guest
Re: Trusts and Distriubuting Captial Gains - Tax Free?

Originally posted by sstjohn
Kevin Munro & Associates (www.taxlegal.com.au) free downladable report ‘Trusts and Tax Planning’ (http://www.taxlegal.com.au/publications/Trust and Tax Planning.pdf) talks about the practice where a discretionary trust revalues its asset(s) and makes a capital distribution of the asset revaluation reserve to one or more beneficiaries.

Briefly the process involves:

1. Revalue the asset
2. Trustee makes a revaluation of capital to a beneficiary (if the deed allows capital distribution)
3. But as the trust probably does not have the cash to pay the distribution it opens a credit loan account in favour of the beneficiary
4. Later when the trust has funds, instead of making a (taxable) distribution to beneficiaries, it first directs funds to repayment of the credit loan account which is not taxable to either the beneficiary or the trustee as it is a repayment of loan principal.
5. The fact that the loan is non-interest baring is, according to the report, not affect it’s status as a debt

Does this mean what I think - you have your IP revalued and create a loan account in favour of a beneficiary for the value of the capital gain and then down the track when the trust becomes positively geared (or even if it is already) and the trust comes to make a distribution, it first debits the loan account repaying the loan account and thus makes a tax free payment to the beneficiary concerned?

Does the above make Steve Navra's cashbond technique redundant? Any opinions?
 
Re: Re: Trusts and Distriubuting Captial Gains - Tax Free?

Originally posted by brains
Does the above make Steve Navra's cashbond technique redundant? Any opinions?

In MHO

Cashbonds show as income. That is good for serviceability.

Trusts set up to distibute capital using earnings/loans. This does nothing for declared income.

Lenders do like to see taxable income so that is where the short term fix of cashbonds works, where trusts are set up for long term asset protection/taxation reasons rather than a prop for your servicability.

I am sure Dale/Steve will sort me out if I have this wrong?

bundy
 
Hi Bundy

Just ran the Deb and Equirty memo you refer to above from kevin Munroe and Assoc by my accountant. his response was:

'The article is a bit out of date as an extension has been given to 30
June 2004. - So some of the urgency has gone.

Note these provisions relate to loans made to a company by the
shareholders (which will be treated as equity)"

Just thought this might be of interest and worth checking.

In any event, it has raised the need in my mind for a formal written record of loans and the basis on which they are made (including interest)

Cheers, Simon
 
Re: Trusts and Distriubuting Captial Gains - Tax Free?

Originally posted by sstjohn
Does this mean what I think - you have your IP revalued and create a loan account in favour of a beneficiary for the value of the capital gain and then down the track when the trust becomes positively geared (or even if it is already) and the trust comes to make a distribution, it first debits the loan account repaying the loan account and thus makes a tax free payment to the beneficiary concerned?

Hi everybody

I think what you implying here is that the trust pays the loan for the capital gain back to the beneficiary without paying either CGT or income tax.

For example

A property worth 1M which has a growth rate of 10% is held by the trust. So the cap gain for 1 year is 100K.

In the same year the trust makes a profit of 100K.

What you are implying is that the trust can hand down the full 100K profit whick is equal to the cap gain of the property without firstly paying CGT as it is not realised and also without the trust or the beneficiary paying income tax ?

Dale is this correct ?

Thanks
Investor
 
if ive understood the qn....

you are essentially just refinancing the money you have "loaned" to the trust, hence no CGT payable
 
Re: Re: Trusts and Distriubuting Captial Gains - Tax Free?

Originally posted by investor

For example

A property worth 1M which has a growth rate of 10% is held by the trust. So the cap gain for 1 year is 100K.

In the same year the trust makes a profit of 100K.

What you are implying is that the trust can hand down the full 100K profit whick is equal to the cap gain of the property without firstly paying CGT as it is not realised and also without the trust or the beneficiary paying income tax ?

Dale is this correct ?

Thanks
Investor

Hi

No, not really. In your example, the trust would need to distribute the $100k income to the beneficiaries and they will need to pay tax on that income. However, the 2nd $100 K unrealised capital gain can be distributed to the beneficiaries free of tax implications until the property is actually sold.

Dale
 
Re: Re: Re: Trusts and Distriubuting Captial Gains - Tax Free?

Originally posted by DaleGG


However, the 2nd $100 K unrealised capital gain can be distributed to the beneficiaries free of tax implications until the property is actually sold.

Dale

Hello Dale.

How would this be documented? In a hybrid trust would you make a credit loan account in favour of a discretionary beneficiary for the $100K unrealised capital gain and then borrow from the bank to repay the loan account. Or would you issue $100K worth of 'special units' and make a $100K payment to the special unit holder to redeem his/her units?
 
Re: Re: Re: Re: Trusts and Distriubuting Captial Gains - Tax Free?

Hi Michael

Wow, you do ask some technical questions . .. and at this hour of the morning, my brain is still in shock mode fromhaving to get up!

Oh well, the things we do huh?

The trustee arranges for the assets of the trust to be revalued. Once this is done an accounting entry is created that records the extra $100k as an asset, and, the other side to a revaluation reserve in the Equity section of the balance sheet.

At the end of the year, that reserve can be distributed free of tax to the beneficiaries.

Quite often, the trust doe snot have the readies to simply hand out the extra $100k and so it borrows more money from the bank, against the new property values, and uses this new money to pay the distribution.

The same can apply for a hybrid trust.

Dale

Originally posted by MichaelM
Hello Dale.

How would this be documented? In a hybrid trust would you make a credit loan account in favour of a discretionary beneficiary for the $100K unrealised capital gain and then borrow from the bank to repay the loan account. Or would you issue $100K worth of 'special units' and make a $100K payment to the special unit holder to redeem his/her units?
 
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