Capital Gain distribution from a Trust - Gross up?

Hi All

I'm new here so go easy

Situation that has occurred:
- Trust sold property and made X capital gain.
- I am a Beneficiary of the Trust (not Trustee)
- Property owned for more than 1 year so CGT discount applied resulting in Y
- Y is distributed to me (note the Trust does not want to distribute X to me nor do I want it)
- I'm advised I need to gross up the Y distribution on my amended Tax return to be X
- I have a large capital loss I am carrying from prior years, thereby losing a lot of this loss to X (as my loss is larger than X)

I have not yet filed my amended return (distribution was received after filing my return).

I don't understand why I would not have to be paid X if I am declaring X as my capital gain.

Or, I don't understand why I wouldn't be offsetting my prior year losses against Y not X. I never received X.

For example, if I wasn't carrying a capital loss, it would appear based on these rules I'd have to pay tax on X despite only receiving Y. I suppose I have found it somewhat confusing.

Can someone explain this better? or advise if there is a better way? I wan't to make sure I get this right before filing the amended return and obviously ensure I get the best outcome within the rules.

Many thanks.

 

The cash from the sale of the property in a discretionary trust can be paid in a manner that is not necessary connected to tax and the 50% discount.

A cut down version of something complex (well I think it is complex - others will say it is easy).

You sell a property and make $120k profit. You have $120k in cash as a result (to make it easy).

The trust has a carried forward tax capital loss of $30k. The trust makes a net taxable capital gain of $90k. The $90k is eligible for the 50% CGT discount. So the trust distributes a net taxable distribution of $45k to you.

You still get the $120k cash payment.

You then gross up the gain in your personal return. You just do that.

If you also had a capital loss of $4k your net gain is $86k. You then get the discount so $44k.

Unit trusts are different. There are other tax concessions at play that I have not considered.

Companies are different as well.

Read your trust deed. Damn important.

Make sure your distribution minute is property written and kept somewhere.

 

Thanks Ross..... X wasn't distributed to me, Y was. Everything else you say I understand.

I should add my capital loss I am carrying is larger than X. I'll edit my post so this is clearer.

 

Ross, do you mean the trust?

 

The gross up is a reversal before you can use your personal net capital loss.

Then you apply the discount again in your personal tax return if any capital gains remain.

e.g. Trust makes a net capital gain using the general CGT discount of $100 which is distributed to you.

Suppose you have a carry-forward net capital loss of $200 and no other capital gains or losses this year.

Your grossed-up trust NCG = $200
Less $200 of your carry-forward NCL
Equals zero net capital gain in your personal tax return. Therefore the discount is not re-applied.

You are paid $100 but lose $200 of losses.

You would need to check the trust deed to determine if the trustee has the power to appropriate the other tax-sheltered $100 in the trust ... it might have been accumulated for your benefit or that of another beneficiary.

If the trustee has "streamed" the net capital gain to you (using discretion) then there must be a reasonable expectation by the trustee that you will benefit from the unpaid amount at some point.

 

I'm with Wylie on this. The complexity of trust issues is something you can easily get wrong. I could post a long thread on mistakes people make with a trust without an adviser. What else was incorrect ?

Trust distributions are proportion based. Unless otherwise determined and allowed by the trust all entitled beneficiaries MUST have their entitlement determined by resolution of a subsequent tax concern arises. It is possible too you dont have that resolution or it may be defective and other benefciaries may have a claim on that adjustment. Perhaps it wasnt correct distributed at al so its not income for a beneficiary but the trustee should be assessed on the tax not the beneficiaries ? This is what can occur when the ATO review trust tax amounts. The ATO often ask for income resolutions.

Tax losses reduce the trust ability to distribute "income". A gross capital gain is always what is distributed by a trustee in a physical sense. However is a loss is applied that isnt something the trustee can distribute - The trust first offsets its loss and then the gross income is distributed. This may leave surplus cash... That can be loaned to a beneficiary but not distributed as income as it isnt income.

Its also important to understand that a trust does not have to physically pay a cent to a beneficiary for the income to be taxed for the beneficiary. Merely crediting a account to hold an unpaid entitlement is sufficient. Failing to make that entitlement available by an accounting entry that reflect the trustee resolution could also be a fatal flaw for tax purposes if reviewed by the ATO. That is very common.

Assuming all is correct. the beneficiary must look through and also apply a discount if the gross trust CGT amount distributed is a discounted gain. If the trust tax return was correctly completed then this poses no concern and is automated by most tax software. Tax agents get it right !

I suspect the trust has made a fundamental tax error if you say Y was the distribution amount. You say you dont want X...Sorry that may be the trust income and your share. You should have received X under the proportionate rules. Tax law doesnt allow an amount other that your share of the net trust income to be distributed.Your bonus is offsetting your cap loss against the trust cap gain.

In theory you would receive X. For tax that is included in your tax return and if you had no other issues a 50% discount is given so Y is taxable and your marginal rate applies. However as you have a tax loss you deduct your loss against X. Any net amount is then halved if there is one and that is taxed.

 

I think the concern is that there was a $100 capital gain made by the trust (example) but this was reduced by the 50% discount to $50.

The trustee distributed $50 to Nicks. Nicks had a capital loss carried forward of $100. Nick's capital gain is grossed up to $100 and then the $100 loss is applied to make the capital gain $0.

But Nicks thinks it unfair as she only received $50 and not $100.

 

From my earlier post: The question is why Nicks loses $200 benefit of net capital losses if they are only entitled to be paid $100 of cash from the trust.

This could potentially be an unjust outcome.

i.e. will Nicks ever benefit from that other $100 ?

It would take a lawyer to interpret the definition of trust income in the deed, the powers of the trustee, whether the net capital gain has been validly "streamed". etc. They will need to determine the beneficiary's rights.

The OP has not stated whether this is a unit trust, in which case the non-assessable amount is likely accumulated for their benefit.

I suspect that most accountants would not understand the depth of the question in the OP.

 

While I agree with the accountants observation by Rob I definitely would expand this and argue that some lawyers wouldnt know the beneficiary or income clauses from Santa Clause let alone address inconsistencies between the deed and tax law. I worked for a trust deed specialist and have had to deal with many lawyers out of their depth on such issues to resolve often complex tax outcomes.

A sign of an accountant who needs education on trusts ?
1. Streaming fixed unit trust income;
2. Recommending a trustee resolution for a fixed unit trust. Other than in compliance with clauses contained in a deed requiring such a resolution by the trustee the unitholder should be otherwise absolutely entitled.
3. Is a trust a fixed unit trust or a non-fixed / hybrid form trust ?
I found that a deed sold by Australias leading trust deed firm was not a fixed unit trust. It was a hybrid as the deed was settled with a settled sum that excluded from unitholder entitelements and solely gave the trustee rights to retain income from the settled amount. IMO that was a hybrid trust. ATO and OSR NSW agreed.

I adopted the implied view from the OP that a "beneficiary" only exists in a disc trust and a unitholder exists in a unit trust of most common form excepting a hybrid or a class disc trust where beneficiaries may co-exist with a unitholder or other fixed rights.

If I was the OP I would seek legal advice as the income distribution may be deficient. IMO the knowledge I have on trusts is only as good as the advice to seek legal resolution since I cant provide legal advice. I must question if the advice to seek legal advice is actually legal advice

Some, not all, accountants get the unit trust issue (and other matters) raised by Rob very wrong. Even the ATO considers that the CGT event for ending a trust interest on redemption requires asset market value to be used. Usually immediately prior to the redemption. Even if the deed uses other methods to determine "value" for redemption. Legal advice on amending to correct the defect should be explored. Thus, income rights that are unpaid and held by the trustee may (or may not) affect the valuation of the units and in some cases replicated through error with the redemption. The timing for redemption of such units is often poorly understood too and a deferred redemption after distribution of income rights may need to be considered. Most accountants also adopt the view that the deed only allows income to be distributed annually on 30 June ? Why? In some cases especially where a CGT event arises a pre-30 June distribution of the CGT amounts separate to other income may avoid CGT consequences and mistake for unitholders.

My favourite issue to identify accountants who dont know much about trusts is the question : Why should a unit trust NOT acquire more than one property ?

 

I can think of 4 reasons off the top of my head.

 

Problem is some accountants think trusts are a easy tax issue that benefits clients. Trust are very complex legal affairs and a hell of a lot can go wrong or pear shaped. In its worst cases it can be an appallingly expensive outcome without any benefits am perhaps expose risks not considered.

The accountant who orders a cheap online trust deed probably doesnt know what the deed says or what a lot of it really means....I really dont think a large no of accountants can explain what a fixed trust is v's a unit trust. They will start to explain land tax.

Most tax advisers will tell you a SMSF custodian trust is a complex legal issue. But its two pages. The DT deed is 40+. The LRBF deed is simple v's other trusts.

Simple test for a disc trust :
- Why do you name both Mum and Dad as primary beneficiaries ? Why should I not do that ?
- Should I name kids as primary beneficiaries on formation ? Why not ?

Two common accountant mistakes I have seen more than once....
- A unit trust with units owned by a DT. To keep costs down the same trustee company is trustee for both trusts.
- Unit trust with a sole unit holder and that person is also trustee...Its quite common . To save costs for a trustee company.

 

To clarify, it is the advice of the accountant doing the Trust's return (discretionary trust) that I be distributed the full discounted gain as Y and gross up to X.

The reason for the distribution is to take advantage of my Capital Loss (greater than X) and thus zero Trust tax and my tax for this event (no other beneficiaries have a Capital Loss). The issues around equality with the other beneficiaries for me receiving this distribution are resolved through other means and therefore not consequential to the discussion. The Capital Loss has value to me, hence why I seek forum thoughts on this matter (I assume that's one of the purposes and benefits of the forum, to share thoughts and discussion).

To further clarify, the CGT event was pre 30 June, my distribution was not fully paid until post 30 June after I had filed my return but before the Trust had filed its. I don't think the filing an amended return is really relevant (other than I need to do it as the Trust has filed it's return now showing it distributed to me).

Happy to clarify anything else. It is an interesting situation though surely not rare nor unreasonable.

 

When did the trustee resolve to distribute to you? When were you presently entitled to the money?

 

When resolved - pre 30 June (first half of this year).

I don't understand the second question sorry.

 

that means when was the trustee legally bound to give you - it needs to be pre1 July otherwise the trustee would be liable to pay tax at the top rate.

 

I'm not sure when the Trustee was legally bound to distribute to me, but I received about 2/3 pre 1 July and about 1/3 post 1 July. It would be the Trust I assume not the Trustee who would pay the tax at the top tax rate.

Anyway I appreciate the comments, however the discussion about me grossing Y up to X (consuming double the amount of my carried forward capital loss) and the amount of the distribution received (being Y not X) is the main purpose of the post and still seems to have forum members here unsure or at least not in consensus (certainly I'm none the wiser after reading all the discussion).

 

If the balance sheet of the trust at 30 June says it owes you "x" it owes you "x"

If the balance sheet of the trust at 30 June says it owes you "y" it owes you "y".

The tax treatment is not necessarily connected to the accounting treatment.

This might be affected by your trust deed so it should be read.