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cashflow loss in trust offset by capital gain

Discussion in 'Accounting & Tax' started by Moist, 21st Jan, 2016.

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  1. Moist

    Moist Well-Known Member

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    Hi guys,

    Simple question for any accountant savy minds: Can cashflow losses from properties held in a discretionary trust with corp. trustee offset a capital gain from a property in that trust?


    Thanks.
     
  2. Moist

    Moist Well-Known Member

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    If the answer is no, then how could one solve the problem of owning a few negatively geared properties in that discretionary trust? as the loss would be trapped I'm assuming.

    I'm assuming one could simply buy some positively geared properties in that trust ( or another trust)

    or

    pay down debt ( but ROC would be less in this case as you would have 'lazy equity')
     
  3. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Cashflow is not a tax concept. Tax losses may be different to property cashflow eg depreciation. So a cashflow square property would have a tax loss for the value of depreciation and capital allowances. Likewise a cashflow negative IP could produce taxable income if some outgoings (eg initial repairs, capital expenses) are non-deductible.

    If losses occur in a some trusts they are quarantined (caught). Unlike personal tax ownership the CGT profit cannot be reduced by these since the CGT cost base rules aren't quite the same. (The taxpayer with the CGT income doesn't have a cost base!)

    However some trusts if they are setup correctly don't quarantine losses. eg A unit trust. The unit trusts typically should not borrow. The unitholder does. Thus the unitholder receives trust income and then personally claims the interest.

    In some jurisdications a hybrid disc trust that complies with ATO rules may be the solution albeit complex BUT few lenders will touch them these days.

    The solution for a DT that plans neg gearing is...don't neg gear a disc trust. Trust can generate income from another source eg another IP (why not just pay down debt ?) etc. The losses do accumulated and can be used in future years when trust income is +ve. Its not lost
     
  4. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    There is no ROC on a neg trust is there ?
     
  5. Moist

    Moist Well-Known Member

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    Thanks for the feedback.

    Sorry I probably should have used 'return on equity' to describe the balance between using all available equity and making a loss/profit
     
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    One trust could also distribute to another as long as the deeds allow it and the rule against perpetuities is not breached.
     
  7. Rob G

    Rob G Well-Known Member

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    Starting point:

    1. does your trust deed discriminate between income and capital beneficiaries?

    2. does your trust deed permit revenue losses to be recouped against capital, and how?

    Net income calculation for income beneficiaries might not allow for tax losses of prior years if the trust requires capital beneficiaries to solely bear the burden.

    In other words, tax losses could be 'lost'.
     
  8. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    And Schedule 2F....Div 265 ITAA36....if it applies