Expense Allocation Against Capital Gain and/or Income ?

I have a family discretionary trust that has both capital gain and ordinary income. It also has various operating expenses such as administration salary and accounting fees etc. When determining the end of year distribution to beneficiaries of the trust what is the acceptable means of allocating these expenses. Is it possible to allocate the expenses all against capital gain or all against income or at some intermediate desirable mix (at the discretion of the trustee presuming the trust deed allows that). I can see advantages in allocating expenses against capital gains especially in the case where discount capital gains are available.

 

Hi,

By your questions, I suggest you get an Accountant to lodge your tax returns to make sure everything is OK.

Briefly, your operating & admin costs are likeley revenue expenses, and provided they are allowable deductions for tax then they are deducted from the assessable income.

Assessable income includes NET CAPITAL GAINS (i.e. after subtracting the cost base and applying any concessions such as the discount if available).

Also, on the trust return you will see certain expenses are set off against their particular income types, e.g. net rental income, net income from business.

General admin expenses, provided they are an allowable deduction, are revenue expenses and would be normally set off against your aggregate revenue income (i.e. not capital gains).

Therefore, if you keep clear accounts and your trust deed allows it, then you might be able to stream the net capital gains to particular beneficiaries independently of the other net income.

It is crucial that your deed allows this or else the Commissioner might deem the distribution ineffective, and tax the Trustee on the net capital gains at 46.5% !!!!!

That is why I suggest you check with your accountant.

Cheers,

Rob

 

Forget the trust deed the ATO has its own set of rules. Section 110-25 of the 1997 act will give you all the detail you need as to what is included in the cost base for CGT purposes., Subsection 4 is particularly exciting. If the sale contract is post 30-6-07 anything that does not qualify as a tax deduction is included in the cost base. It is always better to have a non CGT expense then a CGt expense if the 50% CGT discount applies. Non CGT expenses qualify as a full tax deduction wherease CGT deductions if the asset has been held for more than 12 monts only effectively give you a 50% deduction.

 

Rob G and Julia - Thanks for your reply.
In the past the family discretionary trust has allocated expenses (like admin expenses) against ordinary income. The information that prompted the question was when reviewing end of year details of investments in professionally managed trust funds (unit trusts) I noticed that the capital gains calculations provided by the trust funds would be something like (figures are for example purposes) :
total capital gain = $1000 (I assume this already includes cost base issues).
(taxable) gain = $500, concessional gain = $500.
fund expenses = $100
net (taxable) gain = $500 - $100 = $400.
On further review of trust funds on the web I noticed some that allocated all of their expenses against capital income and none against ordinary income so this caused me to become curious as to how expenses may be allocated.

 

That sounds curious without further information.

Consider this scenario:

Trustee conducts passive investment in GCT property that earned minimal income from rents etc this year. But the assets are generally held both to derive income from rent as well as a capital gain.

Trustee sells a property and makes a net capital gain after discount of $500.

Trustee claims deductions on employing some general admin staff, interest, managing tax affairs, some office equipment depreciation, etc : total expenses $100.

Net income of trust = $500 - $100 = $400

I believe that in the beneficiary's supplementary return that net income from non-prmary distributions is -$100. I do not believe there is a trust loss and I do not believe that Division 35 loss restrictions applies as the Trustee is not carrying on a business.

I believe that the beneficiary's net capital gain from the trust is $500. (note it is reported grossed up and any beneficiary losses applied again before discount if applicable).

This is purely my speculation on what might have given your figures.


As Julia mentioned, you can now add a lot of incidental non-deductible expenses to the cost base of an asset, but the 50% discount means you only get a 50% deduction.

Therefore, it is more tax efficient if the above revenue expenses are claimed against net income of the trust as they are expenses in gaining assessable income from investing, and not specifically costs of acquiring or holding a capital asset.

Cheers,

Rob