Capital Distribution from Family Trust

Hi everyone,

I'm a beneficiary of a Family Trust that is winding up early. I'm aware that when a Trust earns income it can distribute the income to the beneficiaries, and the beneficiaries need to pay tax on the distribution at their personal tax rate.

My question: Is the tax scenario different when receiving capital (cash) from a Trust that is winding up. Will this payment from the Family Trust be counted as assessable income which I have to pay tax from?

I'm only a low income earner, so am slighly worried about having a big tax bill I can't afford.

Thank you for any advice you may have. I'll do my best to answer any questions.

StillLearning

 

Generally not taxable income. s99B(2)(a) ITAA 1936

But if the trust has to sell assets to realise this money then it may be taxable.

Before you vest the trust consider the asset protection consequences and tax consequences of holding the cash.

 

Thanks for your response. From what I understand there was just one trust property sold in 2011-2012 year, so I'm assuming that CGT will need to be paid on that. The trustee informed me that the rest of the capital being distributed to me has already had tax paid on it from previous years, so it shouldn't be taxed again when I do my personal tax return.

It's quite a large sum of money being distributed to me, so I'm still thinking it will be wise to book in to see an accountant for advice. The overall intention would be to use the funds to buy my first property.

StillLearning

 

Capital is not usually taxable - think of it as a person holding $100,000 and that person wants to give you $100,000. It is just a transfer of money. It is only taxable if the $100,000 is a capital gain, an asset or income. If it is an asset then there may be tax associated as it could be a disposal of an asset for CGT purposes.

Now think ahead a few years. What would happen if you were to receive a large sum of money now and then were to go bankrupt, divorce or die? This money would form part of your estate and would be at risk of falling into the wrong hands.

What if you didn't take the money from the trust, or had the money distributed to another trust which you control. There would be much greater asset protection if it was never part of your estate.

You could then borrow money from your trust at nil interest and buy that property you want to live in. Let the trustee take a mortgage over your property maybe. So if you do go bankrupt for whatever reason then the trust will get its money back before other unsecured creditors.