Cata,

What do you mean by “family trust”? Is a discretionary trust not a family trust?

Can you give a for-instance or two?

GP

MiniMogul,

Australia has specific tax laws that relate to Australian residents (ie. people) using foreign-resident (including NZ-resident) discretionary trusts and companies.

If someone is an Australian resident for tax purposes, and the trust or company is NZ-resident, that individual may still be taxed on the income of the trust or company whether it gets distributed to them or not. Even if the settlor, trustees, and/or directors are also all NZ-resident and the individual holds no official position within the structure.

It’s mostly all outlined in the Foreign Income Return Form Guide here:

http://www.ato.gov.au/individuals/content.asp?doc=/content/43914.htm

When the structure is not Australian-resident, it mostly comes down to deemed control. And the definition of control is very broad, to the point where it includes almost any influence the individual or his associates might be seen to have (and the definition of associates is also very broad).

This is not to say that it’s impossible to get around the Australian taxation issue, but it’s not as simple as just having a foreign-resident structure.

And with all due respect to NZ accountants and lawyers, I have to say that this is Australian taxation law, which it seems not even many Australian accountants are very familiar with, and I’d personally recommend advice from an Australian taxation lawyer familiar with foreign investment before setting up such a structure.

One of the unfortunate things about the Australian self-assessment system is that you don’t know how many leaks you’ve got in the dam until it floods. It could be rather unpleasant to then find out that the structure doesn’t hold up.

This is of course all just personal opinion based on my own research, and should not be construed as any sort of advice.

GP

Coastymike,

May I ask a few questions to elaborate on trust loss and FTE rules?

1. If no FTE has been made, then any losses (either capital or income) at the end of the financial year are completely wasted? Are they simply written off the b00ks so that the next financial year starts at profit $0 again (from a tax point of view)?

2. If a private company is fully owned by an HDT that hasn’t made an FTE, does that also stop the company from carrying forward losses? (I read something about that recently)

In my likely scenario at the end of this financial year, where I’ve only been operating the trust for a few months and investing in shares, I’m probably going to have a small realised capital loss and some dividend income, mostly fully franked but also where the shares have mostly not been owned for 45 days (thanks to the price falls back in March and April). So does this mean my capital loss and most of the franking credits will be wasted?

Thanks.

GP

The budget removed foreign loss quarantining altogether, so any foreign losses can now be offset against other Australian income.

At least that’s how I understand it.

GP

Marianne,

This sounds good at first glance, but there are issues to consider:

Once the funds are in the company then they’re company funds, with rather strict rules governing their use. If you want to continue using those funds then you only really have two choices: pay them out as a dividend or find a way to invest them while avoiding having them deemed a dividend.

If you pay them as a dividend, then the tax implications would depend on who the shareholders are. If they’re yourselves, on the top marginal rate, or a trust where you’re the only beneficiaries, then you’ll be back to the top marginal tax rate and have gained nothing by using the company.

If you decide to invest them without doing that, then you either have to have the company invest them in its own name (where you’d lose the 50% CGT discount) or find another way that would be arms-length enough to avoid having a deemed dividend. The rules are pretty tight when it comes to using company funds for personal reasons. There’s not much you can do without it being deemed a dividend unless it’s the equivalent of a commercial, arms-length transaction.

And if you do invest within the company itself, you continue to build up the retained earnings of the company with the ongoing dilemma of how to get the funds out without paying more tax. While the shareholders remain on the top tax rate, this will always be a problem.

As Terry has suggested, investing using a company structure is typically not a good idea. Making trust distributions to a company may not be much better, as it would leave you in the same situation with those funds.

This is all just general information based on my own knowledge and experience, and should not be construed as any form of advice.

GP

Do a search on the forum for hybrid trusts. They’re unitised discretionary trusts and allow for the negative gearing of trust property against an individual’s income.

The properties in your own name should already be able to be negatively geared against your other income.

GP

John,

If you’re considering using any sort of foreign entity, I’d recommend seeking advice from an Australian lawyer or accountant who has experience with foreign investment, as there are special tax rules regarding controlled foreign companies and trusts.

Cheers,
GP

By my understanding, owning units provides a right to the income generated by that capital (not CG though). If the trustee decided not to honour that right, apart from any redress the unit holder might have, the ATO may not allow the unit holder any claims for the deduction of loan interest he/she might have.

The whole point of having units is to provide a right to income to satisfy the ATO requirement that loan interest can only be deducted if the funds are used for income-producing purposes. If the borrower doesn’t have a right to income, then I think the ATO would likely argue that the funds are not being used for that purpose.

GP

Although to me that seems to defeat the purpose of having a trustee company in the first place.

I think for asset protection reasons, and simplicity (ie. tax returns, etc), the idea normally is to have the trustee company do nothing (else) and own nothing.

GP

To the best of my knowledge, yes and yes, although the latter has a “but”.

The units in an HDT or unit trust provide a fixed entitlement to income from the trust, which is what allows the interest deductions when borrowing to buy them. The number of units purchased has to be specified when they are bought.

Income has to be distributed pro-rata across all the unit holders, but only the proportion of the total income that matches the proportion of trust asset value represented by the unit funds (although you should check the trust deed for what it says).

So if $100K of units are bought and the total asset value in the trust is $200K, then only half of the total net income has to be distributed back to unit holders. The rest can be discretionally distributed.

However, this is just my understanding, so you should check your trust deed and get professional advice before acting.

GP