Trusts

Discussion in 'Accounting & Tax' started by thesuperman, 2nd Jun, 2016.

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  1. thesuperman

    thesuperman Well-Known Member

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    Say a discretionary trust has an unencumbered commercial property with a yearly rental income of $40k. After doing the tax you only distribute $25k due to all the deductions like depreciation, repairs, etc. therefore another $15k is sitting in the trust bank account undistributed. Does that mean that $15k cash becomes owned by the trust & say in 5 years time the trust will own $75k cash if the same happens each year? That $15k per year never gets distributed out?
     
    thesuperman, 2nd Jun, 2016
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  2. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    I believe discretionary trusts are required to distribute all profits. You can't retain them in the trust.
     
    Peter_Tersteeg, 2nd Jun, 2016
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  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes. This is capital of the trust, not income.
     
    Terry_w, 2nd Jun, 2016
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  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It will depend on the deed wording. Income may need to be distributed with some trusts as they have 'default beneficiaries'. If income isn't distributed the trustee is taxed on it at the top marginal tax rate (no medicare).
     
    Terry_w, 2nd Jun, 2016
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  5. Greyghost

    Greyghost Well-Known Member

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    If all distributions have been drawn (distributed in paper and drawn via bank) and beneficiary loan accounts are nil then all remaining funds are capital of the trust.
     
    Greyghost, 2nd Jun, 2016
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  6. Mike A

    Mike A Well-Known Member

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    for a discretionary trust however distribution of trust capital (technical term is corpus) doesn't lead to a CGT Event E4 unlike unit trusts.
     
    Mike A, 2nd Jun, 2016
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  7. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Trust income and trust assets should not be confused.

    Trust income is technically usually just taxable income (most trusts). But gross trust income may be rent. Then the trust pays outgoings or incurs costs such as depreciation for which there is no cashflow. ie cash would build.

    Trusts beneficiaries become entitled to the taxable income (or a share of it). Many issues can affect this....depreciation, foreign tax credits, franking credits etc. All get treated slightly differently.

    Its normal that a property owning trust will accumulate cash unless it has a loan. If it has a loan and its P&L the difference between repayments and interest may deplete cash.

    Its nothing to worry about. A trust doesnt "have" to pay in cash what it distributes. Beneficiaries are taxed on a entitlement so if they are paid in cash what was distributed its fine. But it can work in reverse. eg franking credits, withholding tax credits etc. The beneficiary should get a credit for their share. Their cash distribution should be less due to this. The ATO will pay them their cut of that franking credit etc. ...Clearing some beneficiaries accounts is smart to avoid them demanding their entitlements.
     
    Paul@PAS, 2nd Jun, 2016
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