Quarantined losses in trusts

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

Might have to give the ATO a call.. Even though every time I speak to them I feel creepy, like the call is being recorded and saved against my file

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

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