Tax treatment
Scenario:
Our Trust has a taxable income, but also a capital loss during the FY2019.
Does it need to be at least $1 of accounting profit in order to distribute the taxable income? If there is no accounting income, no one can be presently entitled to it, thus resulting in the income being taxed at marginal rates in the trust tax return, am I saying it correctly?
If this is the case, would it be acceptable to move the capital loss to a reserve account? If so, would you do this at the accounting loss value or the taxable capital loss?
Explanation:
This will generally depend on the wording of the trust deed. The key issue is determining whether there is a positive amount of distributable income that can be appointed to beneficiaries of the trust. If not, then the default position is that the trustee will be assessed on the taxable income of the trust, normally at penalty rates.
The distributable income of a trust will not necessarily be the same as its accounting income. You would need to check the trust deed for this particular trust to see if it contains a definition of income and also whether it gives the trustee any power to determine what is included in the calculation of income. Simply moving the capital loss to a reserve won't necessarily do much from a tax perspective.
For example, if the trust deed defines income to be the same as section 95 net income (ie, taxable income), then this would suggest that the capital loss made by the trust, would be ignored in calculating the distributable income of the trust, unless the trust also made some capital gains in that income year which are reduced by the capital loss.
If the deed doesn't contain a definition of income then you would generally use ordinary concepts of income. Capital gains and losses would normally be ignored in this case.
Some trust deeds give the trustee the power to determine whether something is included in the trust income or not. If so, the trustee could potentially resolve to ignore the capital loss in calculating distributable income.
If the distributable income is a positive amount and it is appointed to beneficiaries, so they are presently entitled to the income before year-end and they should be taxed on the taxable income of the trust rather than the trustee.