Can a Unit Trust claim 50% CGT exemption?

Hi,
I have a QLD property looking at a very significant capital gain on sale in the next couple of years, it is held in a Unit Trust. I have a couple questions:
1. Can the Trust claim the 50% discount on CGT?
2. After applying carried forward capital losses, there will still be a substantial gain... but I also have c/f trading losses. Can I then apply the trading losses after applying capital losses to arrive at a minimal tax liability?

Thanks for any advice!

 

Trusts are generally flow through entities. The capital gain will flow through to the unit holders who will pay the tax. If the unit holder is an individual they can get the CGT discount.

If the unit holder has income losses this will help reduce the CGT payable.

Speak with your tax agent about the specifics

 

The unitholder may be eligible for a discounted gain. However issues can limit access to the discount:
- Non-resident unitholder
- UH is a company
- UH is a disc trust in some cases
- UH has carried forward capital losses (these come of the net gain first and the balance is then discounted)
- SMSF unitholder (1/3 discount not 50%)

Trusts often distribute each element of income as distinct from other elements. So a revenue loss AND a CGT gain may both occur. Losses cant be distributed !! The loss may be deferred into the trust etc and only the CGT income distributed. Otherwise if available, streaming may be permitted if the deed allows and it does not affect tax law.

This is an area where a strong tax adviser needs to give advice. Its quite technical with many options / issues and problems.

 

Sorry, Unit trusts are treated like companies and are NOT eligible for the 50% discount on a Capital Gain.

 

JB, what about s 115-100(a)(ii) ITAA97?

INCOME TAX ASSESSMENT ACT 1997 - SECT 115.100 What is the discount percentage for a discount capital gain

 

Terry
Everything I have been told in the past 8 years of property investing is that Unit Trusts are treated like companies and do not get the discount. I would only be too happy if this is incorrect.
Unfortunately the ATO references that I have read do not specifically address a unit trust.
I will do some reading on the subject because I have found some references that cause me to think I may be wrong.

 

I think certain trusts can be taxed like companies but not all trusts.

 

That's correct. The more common example is a 'public trading trust'. Broadly, for a unit trust to be a public trading trust it needs to meet 2 requirements:

1) it must be carrying on (or control) a 'trading' business (i.e. be doing something active rather than just deriving passive income). If the trust is holding property for the purpose of deriving rent this won't be a trading business. However, developing property can be a trading business.

2) It must be a 'public unit trust'. Until recently if a super fund held a 20% or greater interest in the trust it would pass this test and be a public unit trust. However, the law has been recently amended so that super funds are disregarded for the purposes of this 20% rule and accordingly it is much less likely that privately controlled trusts will fall within the public unit trust definition.

 

Yes - trusts are eligible for the 50% discount. However, the discounted capital gain needs to be grossed up when received by the beneficiary and then the discount reapplied if the beneficiary is entitled to it. So ultimately it depends on whether the beneficiary is a type of entity entitled to the discount.

Generally, capital losses can only be applied against capital gains but revenue losses can be applied against either revenue gains or capital gains. However, @Paul@PFI has pointed out some issues with this.

 

There are some potential issues with unit trusts too - potential double taxation and carrying forward losses.

 

Umm yeah nah bro. not nearly as simple as that. eg if you and a friend had equal number of units in a trust that bought an investment property you would be taxed on your individual entities, so the unit holders entity would determine eligibilityof cgt discount and not the fact that it's a unit trust to start with.

likewise with an investment in a business, as in hands off, non operating investment.

 

One structure for NSW is a unit trust with the units owned by a company - it maintains flexibility and still get get the land tax threshold.

But there would be no 50% CGT discount if the unit trust sold the property.

 

? Wrong. Unitholders are entitled to income. The trustee must distribute, its not a disc trust.

 

Thats actually two of the most incorrect things I have read on PC. Claiming double taxation is incorrect and based on poor understanding of the valuation of units and the correct timing and treatment of unitholdings. Losses can carry forward of course but if a Cap Gain then occurs the deed may prescribe that unitholders can only be entitled to net trust income. So the loss may reduce the gain which is then distributed to beneficiaries in a fixed manner.

If a unitholder receives their share of trust income then the value of units falls. If a trust disposes of its sole asset then the units may well be redeemed for the value of the sale and the units hold no value. Often a reason to redeem all units in that year in any event. Or to leave a token unitholding. Its another reason why I never recommend a UT hold more than one property. Bizarre outcomes occur.

 

Paul

What would happen in a situation like this.

X and Y are 50/50 unit holders of ABC fixed unit Trust. The Trust buys property for $100,000. This property value increases to $200,000.

X sells his units to Z. X would have a CG on the units - $50k cost base goes to $100,000.

What happens if the trust sells the property after this for $200,000
Would the trust incur a capital gain of $100,000?

 

This is a very simplified example. One of the substantial limits to a fixed unit trust that complies with land tax in NSW is that the OSR mandate a valuation of units that can cause such a concern. Something I do advise about and caution involvement of any third party at a later date. Its no different to the caution given in QLD that all unit changes are dutiable.

The solution is that some changes are required prior or after the property sale and within the same financial year.

If I were Y I would ensure X redeems units prior to the sale so that Y is the sole unitholder. I would refinance the property to redeem X and then sell the property and wind up the trust in that same year so that no concern occurs.

If the units X and Y hold are redeemed (TRUST ENDS) in the same tax period as the CGT sale then all is balanced. Now lets modify that :
Q : If Y or Z does not redeem units but receives income what is left to payout the units ?
A : So redemption and income should both be addressed at that same time
In the above X has a non-discount cap gain in any event on their units so its not greatly different.

This is similar to the reason why a NSW LTUT should never own two properties or should avoid acquiring further property with a land value of $1m+....

 

The trust would make a capital gain of $100,000. Y and Z would each be entitled to 50% of the capital gain ($50,000) which can be discounted if the unit holders are eligible.

As Paul said, the key to ensuring the correct tax outcome for Z is to make sure the units are also redeemed in the same income year. Assuming the units are redeemed for $50,000 each being the original capital contributed (and ignoring the impact of any tax deferred distributions on the unit holder's cost base):

• Y should not have a capital gain or loss on redemption as the cost base of it's units is $50,000. Y is left with the $50,000 capital gain received from the trust from the sale of the property which can be discounted if Y is eligible.
• Z should make a capital loss of $50,000 on redemption as the cost base of it's units is $100,000. This can be offset against the $50,000 capital gain received from the trust from the sale of the property. Z should pay no tax which is the correct result as the property hasn't increased in value since Z acquired its units.

 

The above demonstrates that its imperative that any client with a trust seeks advice from a tax adviser who has sound trust knowledge. Like rental issues not all tax agents are created equal. As an adviser who has a background in trust establishment and maintenance through Macquarie Group Services I have seen a lot (good and bad).

Daniel has obviously passed the grade. I was waiting for the trust loss v's gain to surface. I had planned a second post to run that but Daniel beat me to it.

Other key issue some advisers overlook is the "transfer of unit" concern. While NSW Land Tax Regs require a fixed unit trust to consider a redemption as a transfer within its requirements for the deed that same issue isnt always a practice for CGT. In many cases a unit redemption and re-issue is preferable to a transfer. The key reason is generally one of two concerns :
- Stamp duty and or
- s66 SIS when a SMSF is involved.
I dont know how many times I have seen an adviser transfer units and create a duty concern.

The other imperative with unit trusts of all forms is the essential requirement to maintain a diligent unithlder record with correct applications, resolutions to issue and certificates etc. ATO and OSR will generally ask for the trust register at first contact and diligence will avoid many concerns.

 

What an extraordinarily messy thread in response to your simple question.

1. Yes, provided the trust not a public trading trust (it would be extraordinary if you have a public trading trust for merely holding investments).

2. Yes, revenue losses may be deducted from other income including net capital gains. There are some conditions attached to trusts being eligible to deduct their revenue losses.

The net income (including net capital gain after discount and) is normally distributed to the unit holders and the ultimate CGT outcome will depend on their profiles.

 

The profiles Rob refers to....So that the net discounted capital gain is grossed up by a beneficiary and if they are entitled to use the discount method they may. Examples of issues:
- A non-resident beneficiary may not be able to claim an Australian CGT property discount
- A beneficiary with CGT losses must first deduct these from the gross gain and then the net gain may be discounted etc.
- A company beneficiary has no eligibility to a discount
- A SMSF beneficiary may have ECPI (exempt pension income) and the gain is not taxed or is % taxed