Distribution of Trust Capital Gains

Discussion in 'Accounting & Tax' started by fatman22, 12th Sep, 2016.

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  1. fatman22

    fatman22 New Member

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    I have purchased shares in a company in a family trust (a while back and obviously hoping to make some decent profits) and am considering the distribution of capital gains from the trust.
    A few questions:
    * Does the trust pay CGT on the profits or is the tax only applied to the distribution of income from the trust at financial year end?
    * I do not have a company trustee established at this stage on the trust deed. Am I able to establish a company trustee now to distribute income/ profits to?
    * If I establish a company trustee, I pay tax at 30% for all income distributed to the company trustee. To get the funds out of the company, I then need to pay tax at the marginal rate of funds distributed to myself? So in essence, I will be getting taxed 30% of income to the company and 30% (roughly) of the funds distributed from the company?
    * How long can I hold the funds in the company trustee?

    Thanks

    Fatman
     
    fatman22, 12th Sep, 2016
    #1
  2. Simon Hampel

    Simon Hampel Founder Staff Member

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    I'm not an accountant or tax advisor, so this is just my understanding of how these things work (we have a family trust too).

    No, the trust doesn't pay CGT. If there are capital losses carried forward, the trust will first offset those losses against the gains to reduce the capital gain. It then pays out the capital gains to the beneficiaries as decided by the trustee. The beneficiaries will then declare those capital gains in their personal tax returns and pay tax based on their own personal circumstances (potentially with 50% CGT discount applying).

    I don't know the answer to this ... @Terryw ? @NickM ?

    One thing to be careful of is that trustee changes can often result in a resettlement of the trust which means you might need to pay stamp duty again. Hopefully someone else can add more here.

    No. The trustee doesn't get the money from the trust and doesn't pay tax on it - not how it works.

    The trustee merely holds the money on trust for the beneficiaries. You can't distribute money to the trustee - you can only distribute money to the beneficiaries.

    Of course, if your trust deed allows it (it may not), you could set up a company as a trustee, distribute income to the company and then only pay 30% tax on that income within the company. However, that company would not also be the trustee company. You generally don't want your trustee company owning assets or trading - it's basically a shell which does nothing except act as trustee for the trust.

    I think you need to be a bit more clear about your goals - are you just trying to minimise tax paid from the proceeds of your share investments?

    Again, the trustee doesn't actually hold the funds.

    If you were to set up a company beneficiary and distribute from the trust to that company, and that company then pays tax on the income at the company tax rate, my understanding is that you don't have to declare a dividend but can instead simply hold that money in the company indefinitely until you decide to declare a dividend (or a return of capital or some other such action) to extract that money out of the company - at which time the shareholder would incur a tax liability.

    There may be issues involved in retaining funds in a company structure which I'm not aware of.

    Note also that companies don't get the 50% CGT discount - so distributing capital gains from a trust to a company is generally not a good idea.

    Hope this helps a bit.
     
    Simon Hampel, 16th Sep, 2016
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  3. Terry_w

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

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    “In a company in a family trust” = doesn’t make sense.

    Do you mean “company as trustee of a family trust? This is probably the case.


    * Does the trust pay CGT on the profits or is the tax only applied to the distribution of income from the trust at financial year end?

    Trustee pays tax on any income that is not distributed. Beneficiaries pay tax on distributed income.


    * I do not have a company trustee established at this stage on the trust deed. Am I able to establish a company trustee now to distribute income/ profits to?

    “I do not have a company trustee established at this stage on the trust deed” also doesn’t make sense. Sounds like you are asking if you can set up a new company that can be a beneficiary of the trust. You will have to read the deed to determine this. Most deeds will be worded so that if the primary beneficiary (or any beneficiary maybe) is a director or shareholder of a company then that company will be a beneficiary.


    * If I establish a company trustee, I pay tax at 30% for all income distributed to the company trustee. To get the funds out of the company, I then need to pay tax at the marginal rate of funds distributed to myself? So in essence, I will be getting taxed 30% of income to the company and 30% (roughly) of the funds distributed from the company?

    - Is there are company trustee?

    - Do you mean beneficiary?

    A trustee may be excluded from distributing income to itself for stamp duty reasons so check.

    Assuming funds are distributed to a company as beneficiary then you need to consider tax issues with taking money out. Shareholders will have tax issues, but there won’t be two lots of tax because of the franking credits.


    * How long can I hold the funds in the company trustee?

    The trustee can hold funds indefinitely (subject to the deed). But if trust income isn’t distributed it will be taxed at 47%


    Sounds like you need an accountant before you get into trouble.
     
    Terry_w, 16th Sep, 2016
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  4. fatman22

    fatman22 New Member

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    Sorry for not having the correct wording in my initial question and I appreciate all the responses.
    I should have said
    * Does the trust pay CGT on the profits or is the tax only applied to the distribution of income from the trust at financial year end to the beneficiaries?
    * I do not have a company beneficiary established at this stage on the trust deed. Am I able to establish a company beneficiary now to distribute income/ profits to?
    * If I establish a company beneficiary, I pay tax at 30% for all income distributed to the company . To get the funds out of the company, I then need to pay tax at the marginal rate of funds distributed to myself? So in essence, I will be getting taxed 30% of income to the company and 30% (roughly) of the funds distributed from the company?
    * How long can I hold the funds in the company?
    Thanks

    You have answered my questions, I just wanted to have some info with me to make sure that my accountant is doing the best for me and also so that I have a better understanding.

    The information is massively appreciated.
     
    fatman22, 22nd Sep, 2016
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  5. fatman22

    fatman22 New Member

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    New South Wales
    Thanks for the info, really appreciated. I have an accountant, just want to understand the setup better.
     
    fatman22, 22nd Sep, 2016
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    2 people like this.
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