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Distribution of Captial Gains between Disc Trusts?

Discussion in 'Accounting, Tax & Legal' started by austing, 3rd Dec, 2008.

  1. austing

    austing Well-Known Member

    Joined:
    5th Jun, 2006
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    Location:
    north maleny
    Hi Gang,

    Questions for any tax experts please:

    Scenario:

    Discretionary Trust 1 (DT1) holds shares.
    Discretionary Trust 2 (DT2) is selling its only asset at a loss this financial year. Eventually this trust will be vested once losses have been used up.

    Both disc trusts have corporate trustees, idential primary beneficiaries and have made a Family Trust Election. The deeds allows other trusts to be beneficiaries.

    Questions/Confirmations:

    1. Given the trustee is a company will there be any solvency issues if DT2 has no assets but there exists a capital loss?

    2. Can DT1 now or in the future distribute any realized capital gains to loss trust DT2 to offset some/all of these capital losses?

    3. How are realized capital gains that are distributed from DT1 to loss trust DT2 treated depending upon whether the sold assets were held less than or greater than 12 months? For example, if the assets sold in DT1 were held for longer than 12 months is only the 50% discounted amount able to be distributed to loss trust DT2?

    Of course while there are losses being carried forward in DT2 even though there are no assets I assume that a tax return will need to be lodged regardless of there being no activity in a financial year. I imagine the accounting fees would be minimal in this situation. Also the annual ASIC return and fee is applicable.

    Thanks in advance - Gordon
     
  2. Rob G.

    Rob G. Well-Known Member

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  3. austing

    austing Well-Known Member

    Joined:
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    Location:
    north maleny
    Hey Rob,

    Thanks very much for your reply.

    I have continued looking into this and bugged a few people to arrive at the following which is applicable to our situation:

    "Trust 1 can distribute capital gains to (loss) Trust 2 as long as both have made a family trust election using the same test individual and Trust 2 does not have a vesting date later than Trust 1.

    A simple minute can be prepared to amend the vesting date of Trust 2 to match Trust 1 (which has the earlier vesting date).

    Extracts from the latest ATO guide on Family Trust Elections supporting the above:

    Family trust elections (FTEs) and Interposed entity elections (IEEs) - Questions and answers

    Q6.1
    What companies, partnerships and trusts are members of the family group of a family trust?
    A
    The companies, partnerships and trusts in the family group are:
    • those that have made an election known as an interposed entity election
    • those (other than non-fixed trusts) where certain members of the family group have fixed entitlements directly or indirectly, and for their own benefit, to all of the income and capital of the company, partnership or trust, and
    • family trusts with the same specified individual in their family trust elections.
    (See subsections 272-90(3A), (4) and (5) of Schedule 2F to the Income Tax Assessment Act 1936). (See ATO ID 2004/876).


    Q4.13
    Are two non-fixed trusts, with family trust elections and the same specified individual, members of the same family group?
    A
    Yes. Following changes to the definition of ‘family group’ that apply from 1 July 2007, trusts with the same specified individual in their family trust election are members of the same family group without having to make interposed entity elections.
    (See subsection 272-90(3A) of Schedule 2F to the Income Tax Assessment Act 1936)

    From what I understand the 2008 budget changes to the definition of the family group should not impact on the above.


    Cheers - Gordon
     
  4. Rob G.

    Rob G. Well-Known Member

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    Melbourne, VIC
     
  5. austing

    austing Well-Known Member

    Joined:
    5th Jun, 2006
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    Location:
    north maleny
    Thanks again Rob,

    I've have heard at times, that distribution between related trusts occurs quite often with them being in technical breach of incorrect vesting dates. This may or may not be correct being here-say. It seems this is more a legal technicality than an ATO issue and hence perhaps why it may not be of great concern to some:rolleyes:

    There is only 2 years difference between our trust deed's vesting date. The deed that needs the vesting date varied allows any or all clauses to be varied etc by the trustee. So we will do our best to abide by the law. Our accountant with one of the Big 4 who is very experienced with trusts (all partners there have them) will hopefully do it correctly:eek: She is away at present hence why my impatience got the better of me and I put the question to the forum in the meantime.

    Cheers - Gordon