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Trust Distributions to Trustee Beneficiary

Discussion in 'Accounting, Tax & Legal' started by PHDorwhat, 24th Jun, 2011.

  1. PHDorwhat

    PHDorwhat Member

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    Hi all, does anyone know anything about distributing income (profit made) or Capital Gains accrued in a Discretionary Trust, to a beneficiary that is a Trustee of another Discretionary Trust?
    For example, if one company is acting as Trustee to two separate Discretionary Trusts, can profit from one easily be transferred to the other without any tax implications or CGT being activated?
    The reason I ask is someone mentioned that a loss in one Trust could be filled from a profit made in the other, effectively wiping out any tax obligation on the profit. Does this apply to any trusts or only certain specific ones?
    I found the below which may be related. If so it seems best to only set this sort of thing up from the very beginning when all details of the two Trusts are identical, is that correct?

    TR 2005/D15 (Finalised) - Income tax: capital gains: meaning of the words 'the beneficiaries and terms of both trusts are the same' in paragraphs 104-55(5)(b) and 104-60(5)(b) of the Income Tax Assessment Act 1997 (As at 28 September 2005)

    If possible, please provide any links to source material, it would be most appreciated. Thanks very much.
     
  2. jrc77

    jrc77 Well-Known Member

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    If the beneficiaries of the trust are setup appropriately, you can distribute the profit from one trust to another trust. If the second trust has made a loss then this will offset the profit from the first trust. The difference (assuming is still a profit) then is distributed to the beneficiaries of the second trust.

    This is my understanding anyway.

    Jason
     
  3. Terryw

    Terryw Well-Known Member

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    There are some complex tax loss rules to overcome with doing this, but it could be done.

    You also have to worry about the laws against perpetuities. Distributing from an older trust to a newer one could mean the gift could vest after 80 years so the rule may be infringed and the gift therefore invalid. Not sure how this plays out in practice.
     
  4. PHDorwhat

    PHDorwhat Member

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    Thanks a lot for your feedback.
    If Discretionary Trust 1 is established, then five years later Discretionary Trust 2 is established with:
    same beneficiaries; same trustee, same appointer/principal, but:
    different settlor and different Deed (from different source) and worded differently, plus the vesting date is different (default to 80yrs) what needs to be done to Trust 2, to enable it to be considered 'the same' as Trust 1, quote from ATO link below:

    There are two conditions, and both must be met, for the exception to apply. The conditions are that the beneficiaries and terms of the original trust and the new trust are the same.
    6. These conditions must be met at the time the asset is transferred. But given that the asset is transferred from the original trust to the new trust, the comparison that must be made is between the original trust immediately before the asset is transferred and the new trust immediately after the asset is transferred.
    General principles
    7. That the beneficiaries and terms of both trusts must be the same is an explicit requirement of paragraphs 104-55(5)(b) and 104-60(5)(b) of the ITAA 1997. Even differences that might be considered minor will prevent application of the exception. It is also noted that the requirement is stated in terms of the two trusts, and not in terms of the asset transferred.
    8. However, this does not mean that the two trust deeds must be worded identically. Rather it requires that the two deeds have exactly the same meaning and effect.

    Tax source: Vesting and termination dates
    20. Aspects of the trust deed and general law which concern the time at which interests in a trust are to vest, or the time at which a trust is to terminate, are terms of the trust and must therefore be the same for both trusts.

    I note the comment in the tax info above that the Trust termination/vesting dates need to be the same. So if Trust 2 was initially setup with an 80 yr period and the Deed has provision for the Trustee to alter the vesting date, can the date simply be altered (by minute or Deed of variation) to the same date as Trust 1, to enable them to be 'the same' and therefore have profit transferred from one to the other?

    On a different note are we only talking about 'profit' and not capital (without gain)? If so, can capital (cash) from Trust 1 be transferred without any taxes or stamp duty to Trust 2, regardless of whether or not Trust 1 and 2 are 'the same'?
    For example, if 5 years ago the capital (cash) was gifted to Trust 1, can Trust 1 transfer that to Trust 2 as a normal distribution, without Trust 2 having to pay any income tax or CGT on receiving it? Eg Trust 1 is effectively gifting it to Trust 2. Is this still called a distribution or something else?

    Does this sort of thing require a specialist tax lawyer? If so any recommendations?
     
  5. Terryw

    Terryw Well-Known Member

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    P,

    That stuff is concerning trust splitting. This involves some of the assets from one trust to the assets of the new trust. This can be useful if you want to pass control, eg a parent has a factory and a farm in one trust and wants to give the farm to the son and the factory to the daughter.

    What you were looking for in the first post is distributing income from one trust to another.
     
  6. Terryw

    Terryw Well-Known Member

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    Also, I think you need to consider the differences between a distribution of profit and the movement of cash.

    There are no tax consequences on gifts. eg. I have $100,000 cash which is a CG from the sale of a property. I can give you the $100,000 cash as a gift. You won't pay tax on this, but I will still have to pay tax on the CG I made - the $100,000 (less deductions etc).