Forum Replies Created
- confused84 wrote:I am looking at a company (trustee) for a family trust. The company/trust made a loss for the last 2 financial years.
However, the balance sheet indicates there are drawings taken out of the business by the 2 individual beneficiaries.Could someone assist me in understanding this transaction and the tax implications please.
1.) Since it is a company trustee, earnings are taxed at company rate -correct?
2.) Since the company made the loss in current financial year, it is not liable to pay any tax. The loss is being appended to the trustee company's equity. How does this get accounted for in the trust financials? Does the company distribute the share of profit/loss to the trust as the trust income ?.
3.) Beneficiary entitlements account reflects :
Mr X (beneficiary) account:
Opening Balance: 100,000
Capital contributed: 20,000Drawings: $25,000
Closing Balance: $95,000.
How is 3.) being accounted. The company and hence the trust made the loss, however, drawings worth $25,000 were made. Are these drawings taxable ? These drawings did not reflect in the beneficiary's personal tax returns.
Thank you for your help.
Hi confused,
To answer your questions:
1) No, not correct. The profits are generally distributed to beneficiaries, and beneficiaries are taxed at their marginal rate. The trustee is only responsible for tax if no beneficiary is entitled to the profit.
2) If the company is acting solely as trustee for the trust, then it is the trust that has made the loss. This loss is shown in the equity of he trust, and carries forward until a profit is made to offset previous lossees.
3) No, the drawings are not taxable. You could look at it this way. Mr X has lent the trust $100,000, and an additional $20,000 this year. He is taking out $25,000, so the trust is basically repaying Mr X some of the money Mr X has lent the trust.
Beneficiaries are taxed on their share of profit, rather than their share of drawings.
Account Right plus includes Payroll, so Standard would be mor than enough.
I'd look at something like Business Basics (I think that's whatthey still call it), which is much cheaper and would be easier to use.Terryw wrote:Not necessarily just the trustee. Its probably not a good idea to distribute to the trustee anyway because if the trust is sued the trustee will be liable.Agree with Terry. I persaonlly think that the trustee company should act SOLELY as trustee, and not receive any distributions. I would incorporate a new company for receiving any distributions.
luke86 wrote:I have no experience in this, but common sense would suggest that as long as you were paying your spouse a reasonable hourly rate, and the hours allocated are in line with the amount of work required, than all would be fine.Cheers,
LukeIt depends on the type of income. Businesses which come under the Personal Services Income rules are not allowed to pa aspouse or child for administration work.
Renting residential property is not normally considered a business, and wouldn't fall under the PSI rules.
It's a grey area, because the ATO could easily argue you are just trying to split income. If you do it by the book, and don't pay too much, you should be ok.
As you have lived in the property first, CGT will be calculated on the value of the property from the date it first earns income. This is why you need the valuation, as it becomes your 'cost' for CGT purposes.
It would be in your interests to have a higher valuation, as the higher the cost, the lower your capital gain will be when the property is sold.
The repairs you have done are not claimable, as they occurred before the property was available for rent.
Generally, if you are living together in a 'domestic relationship', then you are only entitled to one PPOR between the two of you. I don't think there is, off the top of my head, an amount of time living together that then qualifies you as a domestic relationship.
If you had different PPOR's for the 12-18 months, your partners share of the new place would be exempt under the main residence rules. Your share would be subject to CGT for the period where it isn't your PPOR.
For your current place, as you own more than 50%, you would be assessed on half of your gain, from the date your partner moves into the new house until date of sale. If it's inly 12 -18 months, it won't be much.
I'm guessing you would have a bond? This would cover some of the rent that is owed to you. If you have landlord insurance, your policy may cover the rest.
Hi Matthew,
First of all, you are not failing at all. To be 27 with three IP's is a great achievement. You are well ahead of 99% of your peers.
First thing I would suggest is be patient. Even for the few who have amassed large holdings, it didn't happen overnight. We often see the end result, that this young person has amassed an amazing amount of property and net wealth, but we don't realise, or we underestimate, how long it has taken to build their portfolio.
My advice is to read whatever you can regarding renovating and selling for profit, as this is what you want to do. Talk to finance brokers re: the availability of finance and how much you can borrow.
Keep working and keep patient, and focused, and you'll get there.
There wasn't a great deal, really. There was a tightening of the ability to distribute profits from discretionary trusts to minors, removal of the Entrepreneurs Tax Offset, thats about it.
I'm a bit late, but I agree with Jamie. There are a lot of non-financial reasons to own, and the peace of mind that ownership brings is priceless to me.
The other thing I hear a lot is, 'I'll rent and invest the difference'. I'm not sure how many people ACTUALLY do this, but you need to have the discipline to put away the extra funds into another investment.
scotts wrote:Terryw,Thank you, I'm happy to hear that my general understanding of what a trust can do is correct.
Is there anyway for the trust to retain the profits after selling the properties and reinvest without distributing to beneficiaries or paying 45% (or whatever the highest tax rate is)?
The only way you could do this is if the distributions were made to the beneficiaries, and the beneficiaries loaned back their distributions to the trust. The beneficiaries would still have to pay tax on their distributions, though.
EDIT: Oops, Terry already said this. Must read all of post in future!
Hi Jenny,
I'm a CA, and the main difference to me is that the CA training was much harder than the CPA training. The CPA's have closed the gap in the last few years, but the CA training program is still favoured by the big accounting practices, and big organisations such as Telstra and the big banks.
The two bodies have tried to merge three times. The CPA's have voted yes three times, and the CA members have voted no three times. The reason for this, in my opinion, is that the CA (especially the younger ones with fresh memories of their training!) don't want to give the same designation to CPA's, who have completed (again, in my opinion) inferior training.
larrytheinvestor wrote:How does this work: The newer the property the better the depreciation benefits for tax minimisation benefits?Capital Depreciation is 2.5% of the building cost, per year, over 40 years. Newer homes will have a) more years where you can claim depreciation and b) generally a higher building cost, so the depreciation benefits are generally better for newer properties.
Also, depreciation is a benefit regardless of your tax bracket. The higher your tax rate, the better your depreciation deductions will be, but if you have a $4000 depreciation deduction and you are in the 15% tax bracket, thats a tax saving of $600.Better than nothing.
amyhunz wrote:So a child who becomes an adult earning a high income, thereby becoming not very useful when it comes to minimising tax…I guess you just work the numbers and allocate them a small portion of the income…Thanks Dan
We tend to find that the adult aged kids are even more useful for distribution of income. Generally, they may have some part time income, so they can get a larger distribution tax free than they could receive as a minor.
No problem.
Yes, the $3000 tax free is to children aged under 18. After that, they are taxed as an adult on all sources of income.
Yes, the losses are treated the same regardless of whether a company or individual is the trustee.
Hi Amy,
There is no right or wrong answer, and as you have pointed out, there are positives and negatives for using a trust or solely in individual names. Some thoughts re: your post:
1) A trust can be set up for about $1200 – $1500, and annual costs could be anywhere from $500 upwards, depending on your record keeping skills and how many properties the trust owns. $3500 to set up a trust is way too much.
2) Minors, thanks to the low income rebate, can receive $3000 in the 2009-10 tax year before any tax is payable. I think the figure for the 2010-11 tax year, but it has increased to $3333.
3) Losses carried forward. What this measn is the trust shows a carried forward loss, which reduces income in future years. If the property was in individual names, the loss of the IP would be offset against other income in the same year.
4) Setup costs are deductible over a 5 year period, or 20% per year.
5) A trust is eligible for the 50% CGT discount, regardless of whether a company or individual is acting as trustee.
Asset protection is a MAJOR benefit of a trust with a corporate trustee. What you need to ask yourself is whether the asset protection is worth giving up the negative gearing and the extra cost of accounting / set up costs etc.
For example, my share of the accounting practice I part own is held in a trust, but the IPs I own with my wife are held in individual, joint names.
fWord wrote:Shape wrote:Fword- i think you mean one of the advantage of a brand new property..dont know abt the +ve part
Well, I'm no accountant, so I'm getting out of my depth here. But consider the following simplified example on a rental property:
Interest on loans (per annum): $20,000
Total rental income (per annum): $18,000
Shortfall (per annum): $2,000 (assuming no tax refund)Less depreciation benefits which constitute and after-tax refund: $2,200
Result: a positively-geared property returning $200 per annum.
Therefore, a property that would normally cost money to control (ie. have negative cashflow) can actually become positively-geared (ie. positive cashflow occurs after depreciation benefits are taken into account). This is not the same as a positive-cashflow property that has income exceeding expenses, regardless of depreciation.
The problem is that you usually pay a premium for a new house, so your rental yield will be lower to begin with.
kong71286 wrote:Here are a few differences, off the top of my head.
1) The Australian economy is relatively strong, we have low unemployment, and a budget that will be in surplus (apparently) in 2013. The US economy is a basket case, unemployment is over 10% and they are TRILLIONS in debt.
2) It's interesting that the areas mentioned in the link (Florida, California, Nevada, Arizona) are all states with non-recourse loans. We don't have non-recourse loans in Australia.
This doesn't mean that house prices won't correct, or more likely, stagnate for a few years, but are we likely to see massive, US style drops in house prices? I doubt it.
BTW, some of the bearish types here have been predicting the 'bursting of the bubble' for the last three years. What's so different now compared to last year, or the year before?
And before anyone says it, no, I'm not predicting huge gains or sayng that now is a great time to buy. I just think a period of no growth is much more likely than a huge crash, regardless of what happened in some US states.
Hi Joe,
I would advise that you speak to an accountant that has knowledge of SMSF rules and regulations. You will have to pay to see someone, but they won't try and flog you a house and land package or a new trust deed.
not_so_lucky wrote:If person A and person B each own 50% of the property. Once the property is sold it is split into 3 between person A, B and C.Will person C have to pay tax on their share of the money they've received, even though their name was not on the title of the property?
No, the tax is payable by the owners of the property, which in this case is A and B. A and B can do whatever they like with the proceeds – as long as they pay whatever tax is due!
not_so_lucky wrote:When is tax charged? Once the property is sold (taken out automatically) or once a person lodges their tax return?The sale is declared on the tax return, and tax is paid after the tax return is lodged.
not_so_lucky wrote:If person B is in a de facto relationship, will their partner also have to pay tax? Or will their partner be unaffected?No, as B is the owner, so the sale would be shown in B's tax return.
not_so_lucky wrote:Also, if the house was built by owner builders 7 years ago, and they no longer have the receipts, how will they work out the value of the property (when they go to work out the profit)?Hmmm. Firstly, you would (I hope) have a settlement statement for the purchase of the land? This forms part of the cost. Do you have any records of what was paid? This could be an issue, because you don't have any proof of the cost. You could try and see if your suppliers have any records, but seeing as though it's 7 years ago, I doubt it.
