Can a trust distrubute cash if it made no profit

My question is simple enough. Can a trust distribute cash even though it made no profit.

For example
Total income $100k
Total cash expenses $50k
Total non-cash expenses (dep'n etc) $50k
Net taxable profit $nil
Total +ve cashflow $50k.

Can the $50k cash be distributed and if so how is this treated for both the trust and the individuals?

Thanks & Regards

Blacky

 

Think this is how beneficial loans get created.

 

There is income and then there is capital. The trustee can make a capital distribution if the terms of the trust deed allow it.

If a loan is made both the trustee and the beneficiary should consider the estate planning consequences. Same with distributing capital.

I would suggest the trustee get some legal advice if unsure.

 

It varies depending on the type of trust.

If you have a discretionary trust you should be ok but get you're accountant to do the accounts and it will become apparent.

Unit trusts are different.

 

It is a discretionary trust.

We were wanting to avoid benificerary loans. However that may also work.

I guess my way of thinking (which may be wrong) was that the trust(ee) holds the assets for the benifit of the benificeries. Therefore should be able to 'pass' the assets to them. Though not sure on the legality of this.

How does a capital distribution work in terms of tax.

Cheers

Blacky

 

Profit/loss on paper is different to actual cash movements.

 

You would have to read the deed and see if the trustee has the power to distribute capital prior to vesting and who can recieve it.

Distrburion of cash is not taxable unless it is income and no duty issues.

 

Yep read the deed

Beneficiary loans are part of life with a discretionary trust

 

I would generally advise against beneficiary loans because of the many problems they cause. exception is if they are being used as an asset protection strategy. if a beneficiary is borrowing from the trust a written loan agreement is recommended.

 

I'm no accountant but if there are non-cash deductions, the cash is still available for distribution however there is no obligation to distribute as the trust is revenue neutral ie there would be no penalty for not distributing.

 

Blacky why would you want the trust to distribute capital?

 

Basically it is for my folks in retirement.
A trust they are benificeries of owns a couple of properties. They are CF+ but tax neutral/-ve. Therefore the trust will have excess cash available for disribution to pay thier retirement living expenses. However, no profits to distribute.
Hence the question.

We want to avoid benificerary loans based on advice we recieved - which align with your concerns raised.

Blacky

 

Sounds pretty straight forward. Get them to seek advice from their accountant and lawyer.

 

Simple question, but incomplete information provided.

1. Is there a definition of trust income?

i.e. does it purport to recognise depreciation as a revenue expense?

2. Does the trustee have the power to distribute tax sheltered income from depreciation deductions?

Also, does the trust deed distinguish between income & capital beneficiaries? The deed will usually decide if the tax sheltered amount is on capital or revenue account either directly or indirectly via an income equalisation clause.

3. Does the trust have any net capital gain or franked dividends? Franking credits could be lost if there is no "income" for trust purposes such as negative gearing making a 'trust loss' according to the deed. In any case, without a streaming clause any capital gains and franked dividends could end up going to beneficiaries in a proportion you did not intend.


This is really only the start of the questions an adviser would be asking during an initial client interview.

 

Robs reply sums up the key issue. Start with adviser review and advice. Each trust is different.

I had a family approach me with a mutual resolution to vest a large investments trust. Deed review indicated they had no power to do this and that the trust only was capable of vesting OR lending to "grand kids" and not their parents who were trustee. A large amount of court costs later the court allowed vesting as the grandparents had omitted some grandkids and court felt the deed was defective in its terms and there was ambiguity in defining the objective basis of the trust being "benefit of OUR grandchildren"...It missed 2 born after the deed. So the family proposal to vest and to hold all the investmets in a new trust seemed to satisfy the court. But it wasnt cheap or easy to get approval of the court.

Centrelink can also have real issues with both income and non-income distributions and loans to beneficiaries in receipt of pensions. They see it as if the beneficiary has entitlement to the capital even if they dont.

 

Rob makes a good point -it could be 'income' of the trust to which no tax is payable.

 

Strewth - here I was thinking it was a simple straight forward answer.

Looks like its an agent review.

Thanks all!

Blacky