Hi Guys,
New to the forum, but would appreciate some guidance on some confusion I face regarding a technical query.
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.
Generally trusts are not taxed as the income flows through it and to the beneficiary who cops the tax.
Did the company make a loss or the trust? Is the company trading?
I take 3) as the beneficiary having loaned capital to the trust. He is also owed $100,000 by the trust. = $120k owing, and he received $25,000 = $95,000 still owing.
This may be wrong though as I am not qualified in this area.
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
The structure of the business (it is a farming business) is the corporate entity is obviously the trading entity operating in trust for the underlying family trust. So from my understanding the financials are essentially issued in the trust name in such instances.
However, the financial statement reflects as loss in P&L & Accumulated losses in the balance sheet. The financial statements are titled : XYZ Pty Ltd As Truste for XYZ Family Trust.
Yes, I would say the beneficiary essentially contributed the capital perhaps at some occasion however is now making drawings. I wanted to know how are drawings treated for tax purposes. Are these cash drawings ? How do these get accounted for from an accounting perspective.
The company would (or should) be only taking in its capacity as trustee. ie no separate business outside the trust. So the company would have a nil tax return and the trust tax return reflect the business.
It could be that the trust made a profit at some stage in the distant past and instead of distributing money to the beneficiary they just kept a record of it as if they distributed the money and the beneficiary lent it back. So now it is essentially a loan from the beneficiary.
After this the trust must have made a loss which it is rolling over each year.
If this is what happened then the trust could just be repaying part of the loan. The beneficiary would not have to declare this as income as it is just repayment of a loan. The trust would record a reduction in the loan account of the beneficiary as it reduces the debt.
There are no very strict rules about this known as Division 7A loans. There needs to be commercial loan agreements etc in place.
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
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.
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