Tax Question

Just a general question, but in Dale Gatherum Goss's book Trust Magic he talks of claiming all kinds of items when you have a trust, however in talking to our accountant they always ask us to assign a invoice/cost to a property or ourselves, never to the trust as an entity

How then do you claim items under the Trust?

 

The trust may claim the same deductions any other investor would. Expenses for a trust are NOT personal deductions and may in fact be disallowed. A response like that may suggest the tax adviser isn't strong on trusts. That's a bad sign. If the trustee owns a property then the costs are incurred by the trust. In some trusts the interest deduction may be incurred by the unitholders.

Depending upon what type of trust then additional deductions may be available to some trusts using the refinance principle.

One of the larger problems with many trust strategies is that the lenders have changed their policies. Now most banks will only lend to the trustee of a unit trust - Not the unitholders. So strategic structures like a NSW Land Tax Unit Trust and a refinance using the refinance principles are problematic when a bank is involved.

 

Your accountant is probably wrong by the sounds of it. For tax purposes a trust is considered an 'entity' and it can claim expenses related to its income. e.g. if a house is owned by a trustee of a discretioanry trust it would be the trust that claims the rates - you could not because you are not the owner of the house.

 

Thank You

Does the above apply to all Trust types (Discretionary, Hybrid Discretionary, Unit) and how you claim?

 

Yes. You don't claim but the trust claims any expenses it incurs.

 

The trust maintains its own accounting and tax records and lodges its own return (Form T). The trust will operate in accordance with the trust deed which will determine how and how income, expenses and trust distributions occur.

Reporting trust income as personal income may be a stamp duty concern too..

 

We have a HDT and the benefits to income stream to beneficiaries don't seem to be there nowadays, all property income goes to the unit holder (husband) which doesn't work well nowadays as I'm studying ('very' low income).

 

Maybe time for the trustee to redeem the units?

 

Redemption of HUT units is where most people offend the Commissioner. The method of redemption and valuation basis etc require diligence.

 

Thanks guys

Then there's this recently from Gatherum-Goss, which says you can stream income, it doesn't mention type of Trust though?

Trusts have been around for centuries, since the days of knights and round tables and have played many different roles over the years. They can prove an integral tool in your investment and business journey, if used correctly.

API Newsletter Article By Bec Mackie, published 17 December 2015

The biggest advantage a trust can give you is asset protection. Assets owned by a trust are protected from your activities outside of the trust, and conversely, your assets outside of your trust are protected from your activities within the trust. This means that trusts can be a fantastic tool when running your own business or accumulating your assets. When using a trust you also get the added advantage of the ability to distribute income throughout your family to minimise your overall tax payable. Currently minors can only receive $416 in trust distributions before paying the top marginal rate, but you can distribute to your children who are over 18 to receive up to around $20,000 in tax-free income. Trusts can also give you easier access to cash flow and added capital gains tax discounts as compared to running your business or investments through a company.

When considering property investment, a trust can be a great way to protect those properties from your other activities, such as operating a business. However, when it comes to property they don’t suit everyone as we have seen significant hikes in land tax for trusts in some states, in recent years Victoria and NSW. These costs can be significant and need to be factored in when considering a trust to hold your investments. The other issue when using them for property investment is the loss of negative gearing, as any losses must stay within the trust. These issues don’t in any way mean you shouldn’t use a trust to hold your investments, it just means you need to have a good understanding of all the factors before you make your decision to set one up.

Another advantage of using a trust is the ability to move assets around the family and the role trusts play in succession planning. It’s possible to pass a business down to the next generation without triggering any sale just by changing trust trustee company directors. The same applies to your property and other investments. This means you can potentially pass your investment property portfolio onto your children without any tax implications. You also don’t have to wait until your death to do this. It can be done outside of your will and can play an integral part of your succession plan.

Trusts can pay an important role in the structuring of your business and investment strategy and should always be considered and discussed with your trusted advisers. We like to discuss the option of a trust for each property purchase and each new business set-up. You need to review your own situation and plans to determine if a trust is the right structure for you and your needs.

 

The article only deals at a very basic level about discretionary trusts. There is no mention at all about fixed unit trusts which are a highly effective vehicle for negatively geared properties and wanting to move to super at a later stage.

 

Yes I agree that many of the concepts mentioned are simplified for understanding sake. For instance the decision to use a trust should never be considered for the sole or a dominant purpose of splitting income. That's likely to pose a concern as a scheme to avoid tax. Also not all trusts can stream and even those that do can get it VERY wrong.

I don't quite follow the statement "ability to move assets around the family". The true concept is that the assets are never ever owned by the family. Moving assets to the trust could be dutiable too. The trust would own them. There is no movement !! The trust would own assets that aren't family assets as such. Family controlled yes. The problem can occur if the wrong family members control them. A trust can be a problem if that's not perfectly structured.

The testamentary trust issues also described (ie on death) could even financial harm some beneficiaries. Testamentary trusts definitely need tax consideration but more importantly need to be carefully drafted by expert legal adviser.

 

I read that trusts can claim 'sex toys'.

 

If the trust runs a business that generates business income from use of the sex toys then sure. A issue to watch with a trust would be personal services income but even it was the deductions will be limited to those the individual can claim. ie a sex worker can claim sex toys so that should be OK.

 

They were 'gifts' in the book weren't they

 

Agreed paul and having worked with batten before you know as well as i do just changing the trustee doesnt mean it is non dutiable. The change of trustee must be done with specific wording included in the trustee change form or it is dutiable.