On an investment property owned by a Trust (having Company as Trustee), I would like to know if asset depreciation tax deductions of the property can be distributed to individual beneficiaries?
For example, the property has depreciation of $10K for the first year, the Trustee distribute that $10K depreciation to one of the beneficiaries. The beneficiary can then use that $10K as tax deduction for his/her taxable income.
Is this possible? Has anyone done this before?
Hi Welman,
Trying to keep this simple, if you have a trust, the only way you can distribute from that trust is if there is a taxable profit in the trust. If the trust has a loss, the loss is carried forward to a future year to be offset against any taxable income.
If for example your trust has some say dividend (franked) income of $15,000 and a rental property (other income) loss of $10,000, so long as your trust deed allows the trustee to stream different classes of income being franked and other income, then you may be able to allocate any rental property losses (depreciation included) to certain beneficiaries.
Different classes of income included franked income, capital gains and other income. The trustee can allocate beneficiary A all the franked income and beneficiary B all the other income (in this case being the $10K rental property loss)
Hope this helps
Thanks for this insight, Sunnycoastinvestor.
Sunnycoastinvestor wrote:if you have a trust, the only way you can distribute from that trust is if there is a taxable profit in the trust. If the trust has a loss, the loss is carried forward to a future year to be offset against any taxable income.If I get a special kind of Trust (Chan and Naylor PIT) that allows claim of negative gearing (I presume is considered lost of profit) against wages, in this case, I maybe able to distribute rental property losses (and depreciations) to individuals?
Hi Welman,
I don't know much about that particular type of trust so in your case it would be best to speak to Chan and Naylor directly. I know they are one of the leading accounting firms in Australia who specialize in property, however I have no idea as to how their prices compare to other accounting firms.
Good luck
A trust cannot distribute losses. If the trust makes a loss then that loss stays in the trust until the income from the trust covers it in future years.
If your trust is a unit trust and you have borrowed money to buy the units even if that borrowing is secured by property owned by the trust (this is different to the trust borrowing to buy the property) then you might be able to claim the losses eg borrow $400,000 to buy units in trust, trust buys property for $400,000. Trust has rent say $400 per week, $20,000 a year and expenses eg rates, insurance say $5000 and depreciation $10000, then the profit of $5000 is distributed to the unit holders. As your borrowing was in order to earn income then the interest say $20000 can be claimed as a deduction by you against the $5000 income distributed to you and you have a loss of $15,000.
if the trust borrows to buy the property then the trust has income of $20000 and expenses of $35000 and a loss of $15000 which cannot be distributed to anyone.
Of course this is a simple example and you need to make sure the structure is set up properly.
Thanks, crj.
crj wrote:If your trust is a unit trust and you have borrowed money to buy the units even if that borrowing is secured by property owned by the trust …then you might be able to claim the losses eg borrow $400,000 to buy units in trust, trust buys property for $400,000.
It is interesting to know this scenario is possible. Only that using unit Trust could mean less distribution flexibility and lesser asset protection (individual own the units).
It would be interesting to know how the Chan & Naylor PIT Trust (afaik it's a hybrid trust) would handle distribution of loss and depreciations. Anyone has experience on this? I imagine the setup cost would be expensive, but I would like to know if it is worth it.
Welman wrote:Thanks, crj.crj wrote:If your trust is a unit trust and you have borrowed money to buy the units even if that borrowing is secured by property owned by the trust …then you might be able to claim the losses eg borrow $400,000 to buy units in trust, trust buys property for $400,000.
It is interesting to know this scenario is possible. Only that using unit Trust could mean less distribution flexibility and lesser asset protection (individual own the units).
It would be interesting to know how the Chan & Naylor PIT Trust (afaik it's a hybrid trust) would handle distribution of loss and depreciations. Anyone has experience on this? I imagine the setup cost would be expensive, but I would like to know if it is worth it.
Definitely not. Even a so called PIT trust cannot distribute losses. It allows 'negative gearing' because it is possible for a person to borrow to buy income producing units and thereby claim the interest. This would result in the trust making a profit which would be distbuted to the unit holder. So in effect the depreciation is claimed by the trust and this results in less income going to the individual. In a round about way the depreciation is claimed by the individual, but it is not distributed.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks, TerryW.
Taking further the above examples. In a hybrid Trust scenario where a person borrows money to buy Units in the Trust, and the Trust buys the property, the Trust earns $20,000 a year of rental income with expenses of $5000 and depreciation $10000. Therefore the net income of $5000 is distributed to unit holders/beneficiaries.
My question is that because the depreciation of $10000 is being deducted in the Trust before distribution of net income, am I correct to say that there remains a $10000 of cash in the Trust and that it accumulates year after year? Since this surplus cash cannot be distributed, can this extra cash be use to pay property expenses(rates, insurance, etc) for the next year cycle, and in effect increases the net income of the Trust?
Welman wrote:Thanks, TerryW.Taking further the above examples. In a hybrid Trust scenario where a person borrows money to buy Units in the Trust, and the Trust buys the property, the Trust earns $20,000 a year of rental income with expenses of $5000 and depreciation $10000. Therefore the net income of $5000 is distributed to unit holders/beneficiaries.
My question is that because the depreciation of $10000 is being deducted in the Trust before distribution of net income, am I correct to say that there remains a $10000 of cash in the Trust and that it accumulates year after year? Since this surplus cash cannot be distributed, can this extra cash be use to pay property expenses(rates, insurance, etc) for the next year cycle, and in effect increases the net income of the Trust?
I beleive that money not paid out would be capital of the trust. This could be used to pay trust expenses – Subject to the provisions in the trust deed.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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