Trusts & CGT

Hypothetical case,

If a discretionary trust with a corporate trustee has say 4 properties with loans, ignoring any other income.

At some point in the future if it sold one property and say made a capital gain of $100,000.
If it pays that $100,000 off its other loans so there is no distribution at the end of the year, is there any tax payable?

Does the capital gain have to be passed to the benificiaries or is it that there is no distribution so no tax payable.

Thanks,
Kim
 
Originally posted by kheaver
Hypothetical case,

If a discretionary trust with a corporate trustee has say 4 properties with loans, ignoring any other income.

At some point in the future if it sold one property and say made a capital gain of $100,000.
If it pays that $100,000 off its other loans so there is no distribution at the end of the year, is there any tax payable?

Does the capital gain have to be passed to the benificiaries or is it that there is no distribution so no tax payable.

Thanks,
Kim

Hi Kim

The trust will have made a Capital Gain of $100,000 and this must be distributed to the beneficiaries of the trust and they will pay tax on that distribution at their own tax rates.

I have deliberately ignored other issues such as 50% exemptions etc

Have fun

Dale
 
Hi Dale,

What happens if the $100k profit is distributed to a seperate trust? This second trust earns no income so does not pay any tax.

My understanding is the $100k the second trust receives is not income but is classed as an asset for that second trust. The money can just sit there and when it reaches a relevant ammount can be used to purchase things or be loaned back to an active trust for further investment.

How would the CGT be treated then?
 
My understanding is that the trust always has to "distribute" its net income or capital gains - whether that is to a personal beneficiary, corporate beneficiary, or another trust as beneficiary, there is always a distribution.

I would love to know if your assertion that the money given to the second trust can be considered a "gift" and hence no tax applies - but I would be suprised if that were the case.

I beleive you can "cascade" distributions through trusts, absorbing any losses as they go, but at the end of the day any net profits must be disrtibuted - or else tax paid at the highest marginal rate if retained in a trust.
 
Originally posted by Owen
Hi Dale,

What happens if the $100k profit is distributed to a seperate trust? This second trust earns no income so does not pay any tax.

My understanding is the $100k the second trust receives is not income but is classed as an asset for that second trust. The money can just sit there and when it reaches a relevant ammount can be used to purchase things or be loaned back to an active trust for further investment.

How would the CGT be treated then?

Hi Owen

The 2nd trust has to declare the Capital Gain and then distribute that gain to it's beneficiaries. The only advantage would be if the 2nd trust has capital losses to offset against the gain.

I'm not sure where you got your information

Dale
 
Originally posted by Sim
1 ) I would love to know if your assertion that the money given to the second trust can be considered a "gift" and hence no tax applies - but I would be suprised if that were the case.

2) - or else tax paid at the highest marginal rate if retained in a trust.

Hi Sim/Dale',

1) No, it wouldn't be a gift. Just a standard distribution.

2) I thought this was the case. The profit has to be distributed somewhere of I would loose half of it so why not to another trust?

But then Dale kicked in with his bit....

Originally posted by Dale
3) The 2nd trust has to declare the Capital Gain and then distribute that gain to it's beneficiaries. The only advantage would be if the 2nd trust has capital losses to offset against the gain.

4) I'm not sure where you got your information

3) So what you are saying is that 'cash' is not considered an 'asset' even if it is derived from a distribution? Is it still classed as income or profit by the 2nd trust? My understanding was that it is not income or profit for the 2nd trust, just an asset to be stored. It happens to be cash but it could also be a painting, a house, a Masterati (dribble, drool). The 2nd trust does not perform any activity so does not make any profits or loses. It just hold assets.

4) The info came from a mate of course. This friend has been in business for a long time and he described this set up as a 'Wealth Accumulation Trust'. Apparently advice given to him from some high-end accountants and solicitors.

You've got to love Chinese whispers.
 
I could be wrong .. but cash can be an asset in some cases which could be gifted and that would not have any costs involved to pay. But if you distrubiting a profit then it is not gifting an asset so comes in as a income.

So since it is income it would then have to be distrubted again as profit unless you could wear it down by other cost ..

I think I have just said what was above already.
 
Nicholas is right

Owen follow the money trail.

Trustee of Trust 1 declares a distribution and reports on it's tax return that it made a trust distribution to the following beneficiaries.

Trustee of Trust 2 receives cash and a statement "here is your distribution from Trust 1, made up of $x income and $y capital."

Trustee of Trust 2 must now in turn distribute 100% of the income and realised capital gain. Beneficiaries may reinvest that distribution but must declare it on their returns (and pay any tax payable).

Income can't turn into "just cash" without someone going to jail.

Regards

Paul Zag
Dreamspinner
 
OK thanks Paul.

So the bottom line is that as far as the receiving trust is concerned, cash is NOT an asset under any circumstances. It is always income for the 2nd trust and therefore, tax must be paid regardless if the orignal source of money was earned income or capital gain by the 1st trust.

If that's the case then what tax rate is applied to this income by the 2nd trust? Is it the highest marginal as Sim' said? What if the money is taxed by the 1st trust before distribution? Is earned income taxed differently than capital income if left in the 1st trust? Same question if distributed to the 2nd trust?

My thinking is if it is all at the highest marginal rate if left in the 1st trust or distributed to the 2nd trust then it would nearly always be more beneficial to distrubute to an individual or individuals depending on their marginal rates.

The final question in all of this is how does a trust accumulate cash wealth (to further invest with) if it HAS to distribute all profits? Is it just a matter of loaning the money back after tax?
 
once cash has changed from income to an asset (eg declared it as income and paid tax on it) then you can gift it back to the trust as an asset. In that case it is not income. But Income can not just turn in to an asset.

it is following the money, like with borrowing, it is not what it is against but the purpose of use.
 
Re: Re: Trusts & CGT

Originally posted by DaleGG
The trust will have made a Capital Gain of $100,000 and this must be distributed to the beneficiaries of the trust and they will pay tax on that distribution at their own tax rates.

Dale,

I'm confused. Why can't the trust use the money to retire debt? Doesn't the trust distribute after expense income? Isn't retiring debt an expense (yes, a capital one, but still)?

Confused Jas
 
Re: Re: Re: Trusts & CGT

Originally posted by Jas

I'm confused. Why can't the trust use the money to retire debt?

I'm guessing its the same as you and I.
If we buy a property we can't claim the purchase as a deduction, it has to be depreciated, its probably the same with trusts.

Kim
 
I learnt something interesting this afternoon while talking with my accountant which relates to this thread.

A capital loss and only be offset against a capital gain,
however a normal loss can be offset against a normal gain or a capital gain.

So if you had a negative geared property in the trust and carried the losses forward and at some point if a capital gain is made, the losses can be offset against the capital gain.

Something else to consider.

Regards,
Kim
 
Re: Re: Re: Trusts & CGT

Originally posted by Jas
Dale,

I'm confused. Why can't the trust use the money to retire debt? Doesn't the trust distribute after expense income? Isn't retiring debt an expense (yes, a capital one, but still)?

Confused Jas

Hi Jas!

If tax law were simple, I'd be out of a job :D

Seriously, there is a difference in definitions between the use of money and profit. The trust must distribute (via a book entry or actual money transfer) the profit of the trust each year. The profit is defined as the income of the trust less the allowable tax deductions.

Retiring debt is a use of the money within the trust, but, is not an allowable tax deduction.

Does this make a little more sense?

Dale
 
Re: Re: Re: Re: Trusts & CGT

Originally posted by DaleGG
Hi Jas!

If tax law were simple, I'd be out of a job :D

Seriously, there is a difference in definitions between the use of money and profit. The trust must distribute (via a book entry or actual money transfer) the profit of the trust each year. The profit is defined as the income of the trust less the allowable tax deductions.

Retiring debt is a use of the money within the trust, but, is not an allowable tax deduction.

Does this make a little more sense?

Dale

Hi Dale,

A quesion about "book entry or actual money transfer".

If it's a book entry then I am assuming the income is deemed to have been distributed to a beneficiary, tax paid at appropriate marginal rate and then the remaining profit loaned back to the trust. As there is no 'actual money transfer', whose tax return does if show up on. The trusts or the individuals?

Then you comment about retiring debt using the money in the trust. If my scenario above is correct then this answers the question on how the trust can accumulate cash to use but if it is loaned to the trust by the beneficiaries it needs to be paid back sometime. If the trust has to distribute all income every year, how does it accumulate cash to pay back the beneficiaries? It will always be behind. Every if the trust sells an asset then it is creating capital and this must be distributed so it never gets a chance to distribute cash without tax being paid.

I feel I'm going around in circles here. I've had Nicholas Rentons Trust book beside my bed for a few weeks now. I HAVE to pick it up and read it sometime.
 
Re: Re: Re: Re: Re: Trusts & CGT

Originally posted by Owen
Hi Dale,

A quesion about "book entry or actual money transfer".

If it's a book entry then I am assuming the income is deemed to have been distributed to a beneficiary, tax paid at appropriate marginal rate and then the remaining profit loaned back to the trust. As there is no 'actual money transfer', whose tax return does if show up on. The trusts or the individuals?

Then you comment about retiring debt using the money in the trust. If my scenario above is correct then this answers the question on how the trust can accumulate cash to use but if it is loaned to the trust by the beneficiaries it needs to be paid back sometime. If the trust has to distribute all income every year, how does it accumulate cash to pay back the beneficiaries? It will always be behind. Every if the trust sells an asset then it is creating capital and this must be distributed so it never gets a chance to distribute cash without tax being paid.

I feel I'm going around in circles here. I've had Nicholas Rentons Trust book beside my bed for a few weeks now. I HAVE to pick it up and read it sometime.

Hi Owen

I apologise. We are probably talking the same language buy saying different things . . .

The profit can be distributed by a book or journal entry which means that the beneficiary pays tax, if any, on that profit. The trust has been deemed to have distributed the profit although the money still remains in the trusts bank account for it to use elsewhere.

I'm sorry if I am not explaining this very well.

Dale
 
Re: Re: Re: Re: Re: Re: Trusts & CGT

Originally posted by DaleGG
The trust has been deemed to have distributed the profit although the money still remains in the trusts bank account for it to use elsewhere.

Hi Dale,

No apology necessary. I should be finding this stuff out for myself rather than just relying on your generosity of time and knowledge.

However, seeing as we are talking about it there is just one more thing. I now get the 'book entry' bit and your staement above indicates to me that money can stay in the trust account or it can be physically distributed to a beneficiaries account. If it is left in the trust account is it deemed to have been 'loaned' to the trust and could therefore be withdrawn by the beneficiary at a later date for personal use?
 
my understanding is that you can loan or gift money/assets to a trust. If you loan the trust can pay you back as an expense so profit can go back to you tax free, exculding if you say your charging interest that will have captial gains tax or something like that. Also if you personaly got sued then the trust may have to pay then as it is still an asset to you. If you gift it to the trust then it has nothing to do with you any more and nice and safe in the trust. But all money comes back as income meaning you pay it at your normal tax rate.

I would be guessing in the book entry that you are giving it back as a gift. I think someone said the ATO was looking in to loans made to trust with no time line that the trust had to be paid back. if it was a business purpose with the current intrest rate and a pay back then you have no issues.
 
A well drafted unit or hybrid trust actually can hurt a plaintiff.

Imagine winning a court case thereby gaining units in a trust without the ability to change the trustee.

The trustee can then use a book entry to distribute profits to the new unit-holder's account. The unit-holder must pay tax on the profits even though the trustee elects not to distribute the cash.

Now what if units cannot be transferred without the trustee's approval.

Anybody care to discuss a settlement after a few years of this?

This basically leaves expensive Common law or Equity action as the only out.

;) But I'm not a lawyer.

Regards

Paul Zag
Dreamspinner
 
Back
Top