Forum Replies Created
Zen1,
I’m no accountant, but my understanding is that no, you can’t claim interest deductions yourself for an IP in a standard discretionary trust.
As far as I know, the only way you would be able to do so would be to lend the money to the trust at the same or higher interest rate as you borrowed it, which would normally be pointless.
I’ve seen other messages discussing the possibility of converting a standard trust to an HDT. You might like to enquire with a trust specialist about the possibility of doing that.
GP
Originally posted by NickM:go to my website
Which is at:
http://www.strategicwealth.com.au
Just to make it a little easier to find [biggrin].
GP
Paul,
I can’t answer your questions, but what you’re describing sounds like a testamentary trust. Ask your advisor about them.
Cheers,
GPGreg,
I’m no accountant, and have just read up a little on this for my own benefit. You should seek professional advice on this issue.
You can read about it yourself in the tax act if you’re that much of a masochist:
You want Schedule 2F under the 1936 act.
Also, if you do a search there on “trust losses family election”, you’ll get a number of hits on various related interpretive decisions.
Probably just easier to ask your accountant though!
If you do need to make a family trust election, I believe there’s a form from the ATO you need to fill in.
Cheers,
GPOriginally posted by jcls79:if I elect not to roll forward the tax losses to next year, can I apply it to my other income (from job) for FYE 30 June 2005, considering I am the highest income producing person in trust and I’ve bought units in the hybrid trust?
As has been stated in the other thread, losses in any type of trust cannot be distributed and thus cannot offset any individual’s other income (not even the trustee’s).
In the other thread you said the loan was in the trust, so what funds have you put in by buying units?
GP
jcls,
To get the loan out of the trust, I don’t know if you could perhaps refinance the IP by getting the loan in your own name so you could buy units and then pay back the trust loan. Whether or not that would be worthwhile might depend on how much it would all cost to do (especially if you have fixed part of the loan).
And it wouldn’t cover that last $1K of loss. I think the only way to avoid that would be to either increase your rent or try and decrease your costs. Otherwise you’ll just have to carry it forward (which will also require professional advice due to the special trust loss provisions) until you make enough profit to cover it.
Cheers,
GPTerry,
An interesting point. I wonder though, since the loan was used to purchase units even though it’s secured against the IP, if the IP could be sold and the capital returned to the bank without the units being redeemed. I would think (or at least hope, as a unit holder) that there’d be a tie between the injected capital and the units that were purchased with that capital. Otherwise, if I purchased units with my own funds (ie. not borrowed), it could be a worry if the trustee could then just go and distribute that capital elsewhere and leave me with units in a trust with no funds.
Also, by my understanding, a unit holder has a right to all income from the assets purchased with the unit funds. Therefore I don’t think the trustee can just decide to distribute that income discretionally. I would imagine a bankruptcy administrator might hound the trustee through the courts if they did that.
GP
The way I see it, in that situation the unit value would be offset by a secured debt to the bank. You personally wouldn’t have anything that could be distributed to creditors since if the units were redeemed, the funds would have to go back to the bank to repay the secured loan.
I’m no lawyer, so I don’t know if it’s that simple or not, but I’m guessing that would be the situation.
GP
Originally posted by superman:I like the principles of diversification obviously. Every dog has is day!
And perhaps more importantly from a diversification point of view, every day has its dog.
GP
I think if the units were taken, the trustee may be able to redeem them to prevent any further income going to them (that may depend on the trust deed though). If they were bought in the first place using a loan from a bank, presumably the bank would get the money back before any other creditors got anything.
However, if you bought units with money you already had yourself, then I think yes, you’d have a problem. In that case you’d probably be better to gift the money to the trust in the first place.
Of course this is all just general comment based on what little I know, and should not be construed as any type of advice.
Cheers,
GPOriginally posted by zen:why you need a company as the trustee?
You don’t need one, but it adds a layer of asset protection in case the trustee gets sued.
GP
Why did your accountant advise against a hybrid trust?
It seems to me that a hybrid trust would be exactly what you want. It would allow you to negatively gear the investments with your husband offsetting the interest losses against his other income. Any capital gain could then be distributed to you.
I can’t see why you’d want to carry losses forward in a trust instead. That won’t help your husband reduce his tax at all.
It might be worth asking another accountant for a second opinion.
GP
Originally posted by scorpio:If you but a property in your own name – you can offset any losses against tax you pay from your regular income sources – usually a job. If it was in a trust – the trust carries the loss, and not claimed directly against your taxable income.
A hybrid discretionary trust can be used for negative gearing property so that an individual can offset the interest losses against other personal income.
It also gives the benefit of being able to distribute capital gain to different beneficiaries (ie. those on lower incomes).
And there are trust loss provisions that don’t allow trust losses to be carried forward unless a family trust election is made – which then has an impact on who can receive distributions at lower tax rates.
GP
If you’re talking about having your own private company in NZ, rather than investing in a commercial property company, then you need to be aware of the Controlled Foreign Company (CFC) provisions.
http://www.ato.gov.au/individuals/content.asp?doc=/content/43914.htm
I’d suggest you see an Australian accountant or lawyer familiar with foreign investment.
GP
Depends on what sort of bank account you put it in, whether term deposits are acceptable, and how much risk you’re willing to take.
For at-call online savings accounts, the last time I looked the best rates were around 5.25%-5.4%, or 6% with BankWest for the first year. Term deposit rates probably higher if you don’t mind a longer term. And if you don’t mind more risk, you’ll see places advertising rates of up to 10%-12% – but these are not banks and the money is unsecured.
Take a look at the rates on Cannex:
GP
Hi Chris,
That Foreign Income Return Form Guide I downloaded doesn’t appear to be available for download as a PDF file any more. I looked for it again a few days ago and couldn’t find it.
However, there is a newer online version available. The downloaded version I have is for 1997-1998 while the online version is dated 2003-2004. I had a quick look through parts of the online version though and didn’t notice anything specifically different. I could email you the older PDF one if you want it – it’s a little over 2MB. The newer online version is available here:
The parts of the tax act that relate to this stuff, that I’ve seen, are in the 1936 section, part III, division 6 and 6AAA, part X, and possibly part XI. The tax act is available here:
Cheers,
GPJust an update after having had a long discussion with someone from the ATO’s foreign section. I have to say though that the person concerned wasn’t right up with these rules himself, and actually stated that this was the first query they’d had on this topic for a couple of years. For much of the discussion he was reading and interpreting the tax act as we went.
However, the primary points were:
If the trustee was at any time resident in Australia, or the trust was at any time controlled by an Australian resident, then the trust would be deemed Australian resident for tax purposes.
If the trust was considered a non-resident trust for tax purposes, then the transferor trust rules would apply except for specific exemptions. In relation to that:
– Lending money to the trust (for deposits) would be considered a transfer of services.
– Paying off a loan to a bank, where the loan was used to purchase property in the trust, would also be considered a transfer of services (assuming loan repayments were coming from the Australian resident and not entirely covered by trust income).
– Lending money to the trust, even at commercial interest rates, would not be considered a transaction in the normal course of business, as the individual would not be in the business of lending money (which is a regulated activity in Australia).
– One thing he seemed particularly vague on was whether the investing itself would be considered a business. He seemed to think that if the trust had enough properties then it might be considered in the business of property investment. However, how that would affect the previous point about lending money to that trust, I don’t know. That also raises questions with the definition I quoted earlier about eligible business transactions, where that rule seems to require having other customers or clients for a transaction to be considered eligible.
– Irrespective of being considered a transferor, if all income and gains were distributed to non-resident (of Australia) beneficiaries, then there’d be no attributable income. Thus if capital gains could be distributed to NZ beneficiaries then they would not be counted as attributable income.
– The last point however doesn’t really matter, as even if the property was owned in an Australian resident trust, if all income and gains from the property were distributed to non-residents, then they would also not be taxed in Australia. There are special rules about foreign-sourced income being distributed to non-residents. The only real difference is that the Australian trust would have to file a tax return in Australia whereas a NZ non-resident trust may not have to (if it didn’t souce any income from Australia).
– In relation to an Australian resident controlling a non-resident discretionary trust, his interpretation of that seemed to be much the same as mine. If the Australian resident or his associates appeared to have any influence at all over the trustees, (s)he would be deemed to have control. Associates explicity includes other family members, and would almost certainly include non-residents with whom they’d had business dealings in relation to the trust (accountants, lawyers, etc).
In the end though, the onus of proof with any of this stuff would be on the taxpayer. The ATO could simply state the rules apply and it would be up to the taxpayer to put forward a convincing argument that they don’t. If the ATO weren’t convinced, I guess it would ultimately only leave arguing it out in court.
The information provided by this person from the ATO was only for informational purposes and is not binding or advice or any kind. Given how vague he appeared on some of the issues, I’m not sure that his interpretation is any more meaningful than anybody elses. Consequently, I think professional legal advice would still be necessary, rather than relying on anything stated here.
Cheers,
GPHi Chris,
Thanks for the article link, but I don’t see anything there that contradicts what I’ve read in the ATO documents, or mentioned here. It just gives a very basic indication of what a transferor is without going into any detail – as you say, just an example.
Cheers,
GPHi Chris,
Originally posted by masteraccountants:We are talking about business dealings and doing them at arms length.
Without knowing exactly what you’re doing, I can’t comment on that further. However, you may be interested in the tax act’s definition of what constitutes an eligible business transaction in relation to transfers to non-resident trusts. This is from the tax act 1936, part X, division 2-C, section 346:
SECTION 346 CIRCUMSTANCES IN WHICH A TRANSFER OF PROPERTY OR SERVICES IS AN ELIGIBLE BUSINESS TRANSACTION346 An underlying transfer of property or services to a trust is an eligible business transaction if, and only if, at or about the time of the transfer, identical or similar property or services were transferred by the transferor in the ordinary course of business to ordinary clients or customers under arm’s length transactions in similar circumstances and subject to identical or similar terms and conditions as those that applied in relation to the underlying transfer of the property or services concerned.
And in relation to other (ie. non-business) arms-length transactions, division 2-C, section 347 says that an entity is still a transferor if at any time after the transfer they could control the trust (according to the broad definition of control I quoted earlier).
In the end, of course, it is up to the individual concerned to satisfy for him/herself that any arrangement entered into complies with the appropriate tax laws.
Cheers,
GPHi Chris,
Originally posted by masteraccountants:Can I ask you if you have contacted the ATO
I am in the process of doing so, but for international issues the phone support people don’t know. I have to email their international section and wait for them to phone me back.
When a Trust purchases property, it is not a transfer.I agree. However, the funds to make the purchase must have come from somewhere, and I think they are likely to be treated as a transfer – either of property if the cash has been gifted or services if lent.
it is engaged in a business activity, namely investmentI don’t believe investment is classed as a business activity – at least not here. If it were a business, there’d be no capital gains, as all revenue would be treated as business income.
Whenever I am not sure about something that I have read, I seek clarification from IRD. When I was a CPA in Australia, I did the same with the ATO.So are you saying you’ve clarified this with the ATO yourself and they’ve deemed it acceptable? Have you perhaps obtained a private ruling on it?
Cheers,
GP
