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Strategy for using trust losses from prior years

Discussion in 'Accounting & Tax' started by CZ0020, 3rd Feb, 2016.

  1. CZ0020

    CZ0020 New Member

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    Hi everyone,

    I'm new to the forum but have already learned so much just by reading other investor's posts, what a terrific community of like minded investors.

    I have a hybrid discretionary trust (with corporate trustee) that was setup about 15 years ago. Initially we purchased a property in the trust that was then sold about 8 years later. The loan was in the trust name and no negative gearing benefit were claimed for those 8 years. We made no profit on the sale and the accumulated cash-flow loss (for those 8 years) trapped within the trust comes to about $120K.

    If I were to purchase a new IP under the trust but have the loan under my name (to obtain negative gearing benefits), can the trust utilise the accumulated losses from those prior years and make no income distribution on the rental income?

    For example, the trust buys IP for $500K with rental of $450pw, assume 25% property expenses the net rent will come to $18K. I will obtain a $500K loan under my personal name and use it to subscribe to the units allocated to me from the trust.

    Ignore depreciation for now ordinarily the full $18K rental income will be distributed to me as income distribution. Now because the trust has accumulated losses from earlier years can it use that to offset the rental income and thereby make no distribution? So on my personal tax return I will claim the interest associated with the $500K loan but won't receive any income (at least not until the $120K losses are "used up").

    From ATO's perspective, I'm not sure if this will trigger any alarm bells as no trust distribution income is declared even though interest losses are claimed?

    Thanks for in advance for any thoughts shared!

    CE.
     
  2. D.T.

    D.T. Adelaide Property Manager Business Member

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    Invest in things that make a profit instead of a loss? :p
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You will need to get some tax advice. Losses of a trust can be carried forward provided certain tests are met. An income loss may be able to offset other income that the trust has but a capital loss could only offset future capital gains.


    Also don’t assume you can borrow to buy units in the trust and claim the interest. Whether you can or not will depend on the terms of the trust. You would probably need to be, as unit holder, entitled to all the income and capital of the trust. Most of the hybrid trusts set up years ago are not compliant (and never were).


    If it is possible then you could borrow to buy units in the trust, but it may also work out better to have the trustee borrow to acquire the property instead.


    Best to discuss with your accountant.
     
  4. D.T.

    D.T. Adelaide Property Manager Business Member

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    A separate idea to run past your advisor could be to setup a new disc trust and invest within that and dish the returns to your previous trust (on paper)
     
  5. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    If its a hybrid trust its quite likely that you wont find a lender willing to allow a HDT now. If you seek to avoid this by using a related party loan the terms of the trust may fall foul of the ATO views on what a compliant HDT must do.

    Its also possible that the HDT has vested or a more serious issue could be that the special units were not redeemed etc. This can create a complete mess for the new proposed acquisition. As DT indicates a new trust may be a better idea. Perhaps a fixed unit trust ? Streaming income to offset losses to the former trust may well be a tax concern.

    If the property is in NSW or QLD there could be sound reasons NOT to use a HDT for land tax purposes.
     
    D.T. likes this.
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Good points raised by DT and Paul

    A trust cannot exist without the trustee holding some property. Property can be cash or money in the bank, or other 'things'. Does the trust have a bank account and did this bank account ever drop to zero? Was the original settled sum deposited into this account.

    if there is no property the trust may have ceased to exist and any losses lost.

    Because of the added risks in this area and the complexities of the trust it may be better to set up a new trust which could potentially distribute income to the old trust (down the track). Just seek advice on whether this is possible as it will depend on the terms of the new trust - the new trust must have the possibility of vesting before the old trust or the laws against perpetuities will be infringed
     
  7. CZ0020

    CZ0020 New Member

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    Many thanks for the thoughts shared everyone, I will seek my accountant's advice on this one.
    Much appreciate it!