Trust Losses

Hi all,

Looking for a second opinion compared to my advisors.

We have 2 family trusts both with 2 separate Pty Ltd's as Trustee for, neither are employers. There is a 3rd Pty Ltd employing one Director.

Let say:

1. Trust 1 previously built and sold a property development. Now has a loss of $60k and no plans for further activity.
2. Trust 2 owns land with one dwelling. The plan in the coming months is to subdivide and sell vacant block and dwelling on separate titles. Expect gain $150k. Currently there is a loss in Trust 2 of $30k.
3. 3rd Pty Ltd (not trust) is employing Director. The company has a contract with a recruitment agency for $200k Gross Income, the net of which is PAYG to the director as PAYG. That Pty Ltd benefited from the COVID Small Business Cash Flow Boost and has circa $50k cash in the bank, with no real need to purchase plant and equip. I'm not sure it's relevant but I'm sure the contract could be changed to a different Pty Ltd if it's of use (e.g one of the trust Pty Ltd becoming an employer).

The goal is to eventually wind up both trusts and of course pay as little tax as allowed, extracting as much net income as possible.

What would you do to?

Thanks for your advice.
Despina

 

Trust 1 is an income loss?
Will Trust 2 be on capital account?
3rd Pty Ltd appears that it might be PSI income.

I would seek tax advice on if the income from trust 2 could be distributed to trust 1 to offset the loss. Perhaps seek legal advice on whether this is possible and what effect.
Seek advice on whether the small business cash flow boost was lawfully obtained. How did this company get $50k in the bank?
I don't see how changing contracts could help with any of this.

 

Obtain tax advice. Family trust and interposed entity elections and other issues will impact options. And Part IVA. The HR company is likely personal services income from the description. This doesnt mean CFB isnt legit. But how will the company discharge the $50K ? While CFB is tax free on receipt it wont be tax free out again. According to Corporations Act s254T paying that out may be assessable as a (unfranked) dividend. Paying it out as salary a option too.

ATO address that here. It isnt "part of" PSI as such but..... :

Passing on the cash flow boost to others
If you distribute an amount representing the cash flow boost through your company or trust, the tax consequences of the recipients will depend on your type of entity making the distribution.

If your company distributes all or part of the cash flow boost amount to a shareholder, the amount will be treated as a dividend, and it will need to be included in the recipient's assessable income for that income year. We would expect that such distributions will be rare, however, since the cash flow boost is intended to be used to support the business needs of the company or trust.

 

I agree, but think s254T is not the relevant section that makes the CFB taxable. This would be under the ITAA97 Act (or 36 act perhaps) - I am not sure what section. s254T of the Corps act just specifies when a company may pay a dividend.

 

It defines that a payment could be defined to be a dividend when paid to a shareholder. And if CFB is tax free then the div is unfranked since it cant have tax applied. ATO take the view CFB is a dividend in such cases as its not paid using the PAYGW system. Hence not eligible for a deduction.

A payment of profits under tax law. Div7A to the extent of distributable surplus which doesnt exclude exempt income subsection 109Y(2) of the ITAA 1936 - TD 2012/10
s109Y has always had that nasty sting for PSI. Why you shouldnt mix PSI and other income too

 

You've gone off on a tangent there. s254T just says when a company can pay a dividend.

 

Hi Terry & Paul, thanks for the quick response. I'm aware that if I take the CFB out of the 3rd pty ltd I'll end up paying PSI or PAYG whichever way you want to look at it. Please ignore the CFB.

I only mentioned the CFB as there's funds there available if it was feasible to for 3rd pty ltd to loan/invest that into the 1st trust, buy shares and get the benefit of the tax loss when (if) they're sold at a gain.

Alternatively, is there a way that maybe 1st trust can fund the expense of subdivision for the 2nd trust? Perhaps a joint venture and ultimately share in the profits of the sale of the properties, thereby offsetting the loss in 1st trust, and reducing the profit in 2nd trust?

Or is there a 3rd option for 1st trust to charge 2nd trust a project management fee for overseeing the subdiv? Not sure how that flow of money might work, if at all.

Thanks for the advice.

 

Does the 1st trust have any money to lend?
Company lending the trust would trigger Div7A
Is the trust 1 a beneficiary of trust 2?
I don't think a project management fee would work

 

This is a question of tax liability. Only a reg tax adviser can address this. A tax agent service is a matter a general legal adviser isnt isnt per

Actually CFB is very relevant. Failing to get tax advice could be a concern. Only a tax adviser can give advice on a tax calculation and liability. A area where lawyers lack tpb capacity to provide tax agent services eg s109y and div7a. Ignoring the corps act falls into div 7a.

Calculating and determining a tax liability is a tax agent service. Not legal advice. Ensure your legal adviser has this registration. Eg avoid brokers who try to give tax services

 

This reeks of Part IVA

 

I am sorry I don’t understand, can the tax losses be carried forward into future years in discretionary family trust with corporate trustee?
Thank you for comments

 

Yes losses can potentially be carried forward. But there are complex rules to consider

 

Thanks!