Hi All
Does anybody here have a clear understanding of Family Trust Elections with respect to losses carried forward in discretionary trusts? From what I have read it can be necessary to make a Family Trust Election if carrying forward losses in a discretionary trust.
I also read that Imputation Credits are not available to the beneficiaries of a discretionary trust unless a Family Trust Election is made.
Once a Family Trust Election is made then this is irrevocable and the trust becomes a “family trust” with all that entails.
This is all news to me and I am starting to wonder whether setting up a trust was really such a great idea?Regards
Confused SMTM
SMTM,
from my reading I don’t think there is a difference between a ‘discretionary’ and a ‘family’ trust. Have you read ‘Trust Magic’ or N. Renton’s book on family trusts?
TerryTerence McMahon
HomeWin
FinanceYou need a hybrid trust, which contains shares, which allow you to carry forward tax losses to other income, outside the trust.
A hybrid trust is like a family trust witht the benefits of a unit trust.
‘Trust Magic’ explains it all.
Rgds.
Lucifer_auHi
Yes have read all those books and many more. A discretionary trust and a “family trust” are not the same thing, although a discretionary trust will often be called a family trust. Once a family trust election has been made treatment of losses, franked dividends etc changes. The range of beneficiaries is limited also and any distribution to a person or entity outside of this range attracts a 48.5% tax.
Would be interested to hear from anyone with experience in this matter.
With respect to hybrid trusts well yes they sound attractive but it is a little late to change now.Regards
SMTM
Hi Confused SMTM,
The areas of trusts can be quite complex, there are definite advantages in having a trust if you know what you are doing.
For a discretionary trust to be able to deduct a previous year loss it must pass four statutory tests.
50% stake test
Pattern of Distributions Test
Control Test and
Income Injection TestIf it passes all of these then the previous year loss is not denied under this section.
If it doesnt pass any of the first three tests then it may elect to be a “family trust” however it will still need to pass the income injection test otherwise the previous year loss will still be denied.
RE imputation credits, if a beneficary has less than $5,000 imputation credits in total in their individual personal tax return then the credit is still allowed as this is an exemption from the main section.
You should consider carefully before making a family trust election because as you point out it is irrevocable.
You should make the election in the trusts tax return for the year that you want the election to start from.
Maybe you realise now that you should have made an election earlier but now its too late.
The Tax Office has made a once off offer of allowing trusts to make family trust elections retrospectively. The ATO has issued a practice statement http://law.ato.gov.au/atolaw/view.htm?docid=PSR/GA20041/NAT/ATO/00001
So everyboby who has a trust should review their situation to see if they should have lodged a family trust election. Don’t forget that lodging an election can have other consequences so I wouldnt lodge one unless you have to.
This applies whatever the type of trust you have. There are different tests for different trusts.
Regards,
Glenn Wallace
http://www.businessadviser.com.auHi Glenn
Thanks for the reply. Well spelled out and concurs with what I have since read minus the legal babble.
Regards
SMTM
Hi SMTM
when we were setting up our family trusts we were told something about the shares, and family lines and stuff. We figured it didn’t really apply as we were mainly into property in the trust.
However, if we do decide to go into shares, we would more than likely looking at setting up a separate trust – to keep things simple and separate. (Not necessarily simple as more paperwork though!)
Cheers
MelHi Mel
Yes I thought I had done my homework but as with many things the devil is in the detail.
Regards
SMTM
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