Strategy for using trust losses from prior years

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.

 

Invest in things that make a profit instead of a loss?

 

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.

 

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)

 

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.

 

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

 

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

 

How about if the HDT purchased a property and then as part of separation was sold, incurring losses

Can the trust losses be distributed, or they must remain within the trust?

How about if the trust is to be dissolved after that point (as Terry has mentioned - no property within) those losses $100k + are gone?

Or are there options?

 

A trust is a separate taxpayer so it’s losses cannot offset the income of other taxpayers

 

What was the logic of a hdt when the loan is in the name of the trustee and losses are carried forward in the trust?

 

How about getting distribution from another family members profitable trust?
I believe you can distribute to family members or any entities controlled by them.

 

How do you get the money out of the trust if there is no distributable income?

 

It is possible for one trust to distribute to another but the trust must be a beneficiary and there are some legal and tax issues to consider

 

I guess the option is to keep the trust solvent, remove the partner and add income-producing assets that will have future capital gains?

If someone was earning a high income as well they could set up a bucket company or are they better off having in a personal name and selling in retirement/low income days

Is the company tax rate now 27.5% ?

 

Trust losses need complex advice concerning the ability for losses to be used through family trust elections (it is a hybrid trust not a fixed trust). There is an injection test etc to consider.
Its also possible the trust losses are lost. A trust ceases to exist in some cases so you may be unable to "start it up" again. Its a legal concept foreign to many tax advisers but not the ATO. A trust can only exist while it has trust property. If bank accounts were closed etc and unitholders redeemed etc is there a trust ?

 

No. Its 25% or 30%. (2022)

 

Thanks Paul

Trust still exists and holds properties, but sales/transfer imminent

The intention was to wind it up (close bank accounts, dissolve the trust etc) the loss, of a substantial loss is another gut-punch though, so exploring options available

 

Be wary of part IVA schemes to use the losses eg disc trust transfer CGT profits to that trust. But if the unit trust can consume the losses through its own investment thats often a strategy that is safer. Ironically if the market corrects however the losses could magnify where you end up with further losses. Seek advice on the trust loss provisions so that they do remain available.

When using losses many also make the mistake of chasing dscounted gains thinking it reduces the use of the losses. Thats not correct for CGT losses (but is true for c/fwd income tax losses). However when you are using losses thats unnecessary. The gain is reduced by losses first so short term gains are just as effective.

 

that is one option. How do you 'remove' a 'partner' - are they are unit holder, if so the units will need to be transferred to 'remove' them. CGT, stamp duty and lending issues, as well as deductibility of interest need to be considered.

 

Let's use an example.
John Smith has a JoTrust with $100K loss.
His brother Peter Smith is running a business under PetTrust which makes $200K profit.

Can John be a beneficiary of PeTrust? I thought the answer is yes as they are siblings.
If yes, can JoTrust be a beneficiary as well since JoTrust is an entity controlled by John?