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Discounted Capital Gains & Minors

Discussion in 'Accounting, Tax & Legal' started by DaveA, 5th Oct, 2007.

  1. DaveA

    DaveA Well-Known Member

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    I know minors can only have a taxable income of $1100 (approx) distributed to them per year from a DT.

    However, could you distribute $2200 worth of income to them if it was 50% exempt. They would still only have a taxable income of 1100 but give you the ability to send out more cash. Anyone have any ideas?
     
  2. Rob G.

    Rob G. Well-Known Member

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    Yep.

    s.102-5 Your assessable income includes your net capital gains. This being after setting off trust losses and applying any concessions.

    Of course the non-assessable part will normally be capital, so usually they must also be a capital beneficiary. You might have a clause in the deed stating trust income corresponds to Taxation Law income.

    But usually the non-assessable capital gain is still treated as trust capital in the trust deed. Also, if the beneficiary has capital losses in their own name there is a double bonus as you can set off their personal capital losses to reduce assessable income.

    Cheers,

    Rob
     
  3. Rob G.

    Rob G. Well-Known Member

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    By the way, with the Low Income Offset, unearned income can be $1333 for 2006/07.

    Cheers,

    Rob

    (PS. I assume it is not a testamentary trust).
     
  4. DaveA

    DaveA Well-Known Member

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    Sorry rob, just wanting to clear what you said up (its too early on a sat morning..)

    Trust has 5k of incone in the year, 2500 was discounted capital gain (so 1250 was assessable), and the other was say 2500 (1750 of cash 750 of FF) of FF divs.

    So it would be fine to distribute the whold 2500 to the minor (whos assessable portion is under the threshold), and then the 2500 any adult (or spilt 50/50 between two minors who both would get refunds on the credits...)
     
  5. DaveA

    DaveA Well-Known Member

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    Thinking about this a little more, and i think ive stuffed up my figures somewhere- can anyone see a problem (adult on 30% tax bracket)

    Distribute $1300 (of assessable income) to the minor (910 cash, 390 FC), this would lead to a tax return of $310

    Distribute 2500 (1250 of assessable) gains to the adult and the remainder dividends (1200 made up of 850 cash, 350 FC). Total Tax bill would be (375 (gain) + 350-350 (FC offset the gain)). Total tax payable 375.

    Combined Total Tax payable is $65 (effective tax rate of 1.3%)

    The other way would be
    Minor - nill tax
    Adult - FC offset the divs so nill tax would be payable
     
  6. Rob G.

    Rob G. Well-Known Member

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    Dave,

    Very briefly ...

    Income according to trust law = dividends $1750

    An old trust deed might not recognise franking credits, and the capital gain will be corpus (i.e. pre-1985 deeds are dangerous) and so the latter will not normally be distributable.

    This is the tricky part - make sure your deed regards trust income to be the same as the ITAA definition of 'net income'. Also make sure your deed allows streaming of different income types.

    Net Income of trust (assessable income according to ITAA):

    NCG $1250
    Div $1750
    FC $750

    You can stream the NCG to a beneficiary entitled to the CGT concession (e.g. not a company) - even better if they have a capital loss carried in their own name as they get to recoup against the distributed capital gain.

    Similarly you can stream the franked dividends (with credits) to a beneficiary who is entitled to use the credits - e.g. an Australian resident who does not have more than $5000 total franking credits.

    Your example does not really exploit this feature, but if we distribute the NCG to the minor:

    Minor Beneficiary

    Assessable Income: NCG = $1250 (actually double, set off beneficiary losses & discount)
    Tax Liability (after Low Income Offset) = Nil

    Adult Beneficiary:

    Dividends $1750
    FC $750
    Assessable Income = $2500
    Gross Tax Payable (@30%) = $750
    Less FC $750
    Net Tax Payable = NIL

    Don't forget franking credits are refundable so they are useful to all marginal rate taxpayers.

    Cheers,

    Rob