Depreciation Schedule for Discretionary Trust

Discussion in 'Accounting & Tax' started by Mill, 10th Jan, 2020.

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  1. Mill

    Mill Well-Known Member

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    Hi All,

    I am trying to figure out the benefits of getting a depreciation schedule for a slightly negative geared property held by a discretionary trust. Yes I could just ask my accountant but thought other people might benefit from a forum post :)

    Let's say in Year1 the Rent-Interest-Expenses = -$1,250

    Then subtract another $500 of depreciation the net position is -$1,750.

    Since losses cannot be distributed, what is the point of having an extra $500 of deductions?

    From what I understand you could carry the loss to subsequent years.

    Let's say in Year2 the Rent-Interest-Expenses = +$2,000

    Scenario no depreciation: +$2,000 minus last years loss of $1,250. Net position is $750 gain. The $2000 in the trust account would be distributed $1,250 whoever covered last years real cash loss & the leftover $750 to beneficiaries.

    Scenario with depreciation: +$2,000 minus last years loss of $1,750. Net position is $250 gain. The $2000 in the trust account would be distributed $1,250 whoever covered last years real cash loss & the leftover $750 to beneficiaries.

    Since the trust should distribute all real cash (to avoid paying top tax bracket), the outcome is the same for both scenarios

    Either this is right or I'm guessing I've made a wrong assumption somewhere?
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney

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    wrong assumptions.
    Taxable income won't equal trust income.
    Trust doesn't have to distribute all real cash. Just make a beneficiary presently entitled to the taxable income of the trust.
    Losses can be carried forward
     
  3. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The depreciation expenses will reduce the taxable profit. Or enhance the loss until it turns +ve geared.

    You may be confusing net trust income for tax purpose and cashflow. The trust is only obliged to distribute net income. The depreciation may accumulate cash in the trust. It could be discharged as capital, not income. Or used for other purposes eg a repair.

    Its same for a human taxpayer. They pay tax on taxable income. Not cash balances
     
  4. Mill

    Mill Well-Known Member

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  5. Mike A

    Mike A Accountant

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    When was the property purchased ?
     
  6. Hamish Blair

    Hamish Blair Well-Known Member

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    Cost base is reduced by depreciation so eventual CG is higher.

    Will the ATO reduce the cost base by depreciation regardless whether claimed or not?
     
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney

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    I think the legislation says 'claimed, or could have claimed'. so yep
     
  8. craigc

    craigc Well-Known Member

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    Hi Terry,
    Think we discussed/mentioned this before - what if it’s outside tax return amendment period?
    Could that be claimed?
     
  9. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Personal tax advice time. It may be a problem / issue to amend a trust return to reduce net trust income.
     
  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney

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    Yes true. It is unable to be claimed if outside the amendment period so it might be able to be added to the cost base
     
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  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney

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    Changing the income of a trust is dangerous to dabble in because certain people have already been made presently entitled to the income of the trust - taxable and trust income. A trust having more income could mean one or all of them or none of them have extra income entitlements and tax or the trustee is taxed at the top marginal tax rate. A trust having less income means it might have to try to clawback income from a beneficiary. The income or one or more beneficiaries could reduce. It all comes down to the wording of the trustee's resolutions.
     
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  12. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    As a practice I dont amend distributions after lodgement. Not without trustee legal advice, A PI risk.
     
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