Tax Tip 325: Trusts Can Negative Gear

A comment that I hear often is that ‘trusts cannot negative gear’. This is not correct.

Trusts can negative gear and so can SMSFs and companies too. Any taxpayer can.



Example

Trust A, a discretionary trust, holds

Property A which generates $20,000 per year in income.

Trust A buys an additional property, Property B, which generates a negative income of -$5,000 per year. Assuming the trust borrows for this property this is a negative geared property.

Net income for the trust would be $15,000 because it is using negative gearing to reduce its taxable income.



What people probably mean when they say a ‘trust cannot negatively gear’ is that losses of a trust cannot be used to reduce someone else’s personal income – this is also probably not correct, but I will write about that next time. A loss from a trust cannot be distributed to someone else would be the more accurate way to describe it.

But this is the case with any taxpayer. Spouse A running at a taxable income of negative $5,000 per year cannot use this to reduce the income of Spouse B who is on say $50,000 per year. Nothing special or unusual with this.

So, the next time you hear someone say ‘trusts cannot negative gear’ please correct them.

 

Looking forward to your write up Terry.
New first gem post for 2021.

 

The other (related) issue even many tax advisers get wrong is that trusts cant distribute a tax loss. They definately can !! (There are some catches)

eg If Trust A has one IP and it is a tax loss than that loss cannot be distributed. It is retained in the trust and reflects as a carry forward tax loss.

But if Trust B has a IP and dividends it could be very different.
eg $4,000 tax loss on rents, $3K of CBA divs. Total trust income is -1K. However for income tax purposes the gross up of franking crecdits of $1285 leaves a net trust income of $285. This is a example akin to terry's example above. The trustee may resolve to distribute all trust income ($285) to David. David would receive a distribution for tax purposes that includes the following elements:

1. Franked trust income of $4285
2. Franking credit $1285
2. Net trust loss of $4K
At item 13 Davids extra taxable income would be $285. However if that dividend had not occurred then the trust cannot distribute any amount. The trust mau have NET trust income of at least $1, Remember that franking credits add to trust income.

I have seen many trusts where there is a rental loss. A strategy to circumvent losses being quarantined is for that trust to buy a small qty of dividend paying shares. Itmay be necessary to reverse calculate the break even position to ensure this is met so that the trust has at least $1 of net income after all deductions including depreciation etc All the trust requires is $1 of NET trust income to force the issue. This can be positive in one catgory of income and negative in another !! This could be interest, cap gains, dividends of trust income. Care should be taken with ETFs and managed funds to avoid non-taxable distrubutions eg Amit / tax deferred amounts

Personal advice from a sound tax adviser with comprehensive experience in trust matters is well recommended.