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Hypothetical Q on gifting to trust

Discussion in 'Accounting & Tax' started by eggnog, 4th Aug, 2015.

  1. eggnog

    eggnog Active Member

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    Say you gift money to a discretionary trust. As I understand it, at the end of each financial year the trust has to distribute funds to its beneficiaries. Does it also have to distribute the money that it received as a gift?

    Another scenario. Say the trust has served its purpose and will be closed. The money gifted to the trust has to be distributed to the beneficiaries. Will this money that was gifted be taxed once received by the beneficiaries?
     
  2. FireDragon

    FireDragon Well-Known Member

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    As far as I know, at the end of the financial year you don't need to distribute money that is received as a gift. The tax experts in this forum can confirm.
     
  3. Greyghost

    Greyghost Well-Known Member

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    There is always the need to review the trust deed to determine what contributes income and capital of the trust.

    But keeping it really lay, disregarding any income etc any funds contributed will be shown as a liability in the trust balance sheet owing to you. You then draw these funds out at different points it reduces the beneficiary loan amount owed to you.

    If you receive a distribution it will be added to this account also.

    I could explain the technical standing in this but the above is the basic mechanics of it.
     
  4. eggnog

    eggnog Active Member

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    Thanks greyghost. Does this also apply to funds gifted to the trust? When you gift something doesn't it mean that it is exactly that, a gift, and that their is no obligation or liability to pay it back?
     
  5. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent

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    A gift, properly documented with a resolution to gift, would be an increment to corpus.

    It WILL NOT be a liability on the balance sheet.

    The trustee must only distribute trust income at the end of each year. An increment to corpus is not trust income so wouldnt need to be distributed.

    A lawyer can only provide such documents and proper record keeping is very important.
     
  6. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Mike makes a great point and I'm sure he has also seen cases where the ATO can classify what many will call a "loan account" and they may argue the receipts are income. The onus is upon the taxpayer to demonstrate the source AND the nature to have them not classified as income. Unfortunately in many cases its a blend of personal, corporate, family, other trust, business profits etc money poorly documented as being "gifted" or lent to the trust and the ATO maintain their approach to call it income. They then ask about the "loan" account and seek documentation and terms etc.

    Diligent records are a absolute must as this is the area of enquiry where fraud and evasion allegations surface. The ATO can ask what the source of a single deposit is ten years later...Referring now to terry's Tip 7 on retaining records forever.
     
  7. eggnog

    eggnog Active Member

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    Thanks for the reply Mike and Paul. In regards to money that form the trust corpus, when the trust is vested or closed and these funds are distributed, will the beneficiaries have to declare it as part of their income? Just trying to understand what happens in a scenario whereby a person pays taxes on his income, gifts the after tax income to the trust, the trust gets closed and the gifted funds is distributed to a beneficiary. If the distribution is considered income and taxed then the ATO is effectively double dipping.
     
  8. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    The ending of a trust may give rise to a number of tax issues:
    - A CGT event
    - Stamp Duty (once or more depending how its done)
    - Personal tax consequences that include cap gains or income for a beneficiary

    Generally speaking, corpus itself wont be assessable to a presently entitled beneficiary. Think of it as a return of capital. The ATO doesn't generally seek to double dip.'The ATO seek to tax net trust income or other forms of income. A corpus distribution should be tax free. In a simplistic way of looking at this issue if that "gift" of funds has grown there may be a CGT issue for the trust or a beneficiary. But it can depend how well / badly its handled too... Always an area for advice before acting. Legal and tax advice.
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    capital can also be distributed before vesting - depending on the wording of the deed. Watch out in the deed for who can receive capital and who the default capital beneficiaries will be on vesting..