I think that settles the issue.. It’s not that big a deal anyway since the trust isn’t doing anything or owning anything, just passing through distributions.

Thanks guys

Ok, this is the story as I understand it after finally hearing back from the ATO and doing a lot of reading in their database of 1936 legislation..

For discretionary trusts, unless you have a family trust election, basically any change to the potential beneficiaries will cause all quarantined losses to be void. This makes it very tricky to reliably quarantine losses in discretionary trusts unless the list of beneficiaries is limited and not dependent on the identity of the trustee etc (if you are ever considering swapping trustees).

If a family trust election is made then the beneficiaries are effectively ‘locked in’, which means that the ATO accept that the beneficiaries will not change and ignore that test.

Further, even if beneficiaries remain the same, the distribution pattern (for both income and capital) can only vary slightly from year to year, so if you distributed 100% of income to your wife one year, then have a year in the negative, then in the following year you offset those losses against income in that year, you are only allowed to do this if you distribute at least 50% of the profit to the same person who recieved distributions in the last profit year (your wife in this case).

I’m guessing the reasoning behind this is to protect the entitlements of the ‘new’ beneficiary from losses incurred in years of trading where a different individual was entitled to the distributions. It makes sense from that perspective however it makes it very dificult to simply use alternative tax brackets out of convenience in a discretionary trust where losses may be trapped for a while…

The pattern of distributions test applies to any discretionary trust, regardless of whether a family trust election has been made.

For unit trusts the same test applies if there are discretionary unit classes (income or capital), or if the unit trust is a hybrid with beneficiaries.

In addition to the distributions pattern, the ownership of units in a unit trust may also only change so much from year to year (this would replace the changed beneficiaries test I presume). Basically, if units have been transferred, if new units are issued, if existing units are revoked, or anything else have happened whereby the ownership balance of either income units or capital units have changed by 50% or more from the last year of profitable trading, then losses from previous years can no longer be offset.

There are a tonne of other rules as well, but these are the ones that I would be most likely to trigger. The bottom line is that if your trading or distributions patterns, or unit ownership are likely to change significantly then you can pretty much forget about quarantining losses in trusts. However, if you make sure unit holders or beneficiaried havn’t changed, and you are careful about where the distributions end up in the first profitable year where you are applying quarantined losses then you should be ok.

Cheers,
Carl

Yeah I’m able to shift any amount of income around the ‘black hole’ of deductions so to speak, to make sure I look like I’m not making a personal loss and to use various tax free thresholds etc.

I’ve checked with the ATO, they think it’s ok to quanantine the losses but they will verify and get back to me within 48 hours.

Cheers,
Carl

I thought I’d get an answer right away.. Doesn’t anyone know this?

Ok, here is another hypothetical one; what if a trust was created last year or whenever, and the deed was written in such a way that appointor could be changed at a later date, thus effectively transferring control of the trust to a different entity.

If a contract was signed today and/or nominee, then the trust was transferred into the person’s control who signed the contract, then there should be no legal reason why the trust could not hold the property, am I right?

I realise that if you want a corporate trustee you may need to also buy a shelf company that was incorporated at a date before the exchange of contracts, since after all, it’s the trustee who will be on title.

Or, in a worst case, you may need to use a different company or yourself as trustee momentarily, then create a new company and change trustees after.

Any comments?

I guess it’s one of those things, don’t do it unless you’ve got a good reason. Thanks for your input Dazz.

Hi Cata

Some accountants have told me that when you use and/or nominee the nominee must be an entity that existed at the time that you signed the contract. The logic being that you can’t intentionally nominate something that doesn’t exist. But you think this is ok as long as the entity is set up before settlement? That would be more convenient in my situation…

Cheers,
Carl

Even better!

What’s your take on capitalising interest payments using a line of credit for an investment property? Lets say for argument’s sake that the person in question had no non deductable debt and that the rent from the property just hit the LOC as it arrived..

Ah ok… It’s all starting to make a little more sense now.

Ok, so lets imagine that my GF is not going to be in a position to buy any property in the next while, and the purpose of the loan/investment is just to save up for a deposit for a property, then her servicability won’t become an issue until she wants to use her capital, redeem her funds, and thus pay out her loan. In this situation it doesn’t matter so much if her serviceability is hurt in the short term. When her funds are redeemed her mum can then refinance the loan in her name only (with my GF being taken off the title if necessary) which would free up my GF’s servicability for her own property.

My question then is, if they split the loan, add a 20k part, IO that my GF can use for her investing, because they are both on the loan, can my GF claim the interest payments on the 20k split as a deduction for herself (provided she can prove the funds were used to generate taxable income for herself only), or are they forced to claim the deductions relative to their title ratios?

Thanks a lot for helping out guys, I really do appreciate you taking the time.

Cheers,
Carl