Ask a Tax Man – How is a trust’s profits distributed?
Mr. Naidoo needed to know if his plans to sell his current home to his family trust and buy a second, or new, primary residence was financially sound and clever from a tax perspective. Read #AskaTaxman’s response here.
This is his follow up question.
Just thinking through the response, the following point is unclear. “I would not have any profits distributed to the trust as this will be taxed at 45%. Rather distribute these profits to the beneficiaries of the trust; their individual tax rates should be less than 45% per annum.”
The trust will incur interest on the bond and other expenses which will be tax deductible against the tax payable on the rental income. Any profit or loss therefore automatically vests in the trust, so not sure how one would “distribute” the profit or loss to the beneficiaries for tax purposes as the trust has an obligation to file its own tax return- surely the profit or loss for each year remains in the trust?
No not at all. Losses definitely can be kept in the trust which would be a benefit to write off against future profits. In fact, you cannot distribute losses to the beneficiaries. But profits, on the other hand, can be distributed to beneficiaries as soon as the trust makes profits. Even capital gains, should you wish to sell the property, can be distributed to the beneficiaries and they will then pay capital gains tax in their personal capacity.
On the trust’s tax return and financials you will state the fact that distribution took place. The profit on the trust’s books will be shown as zero. Each beneficiary who then receives this income form the trust will need to indicate it on their individual tax returns. This is because the trust tax return and individual tax return needs to correspond to prevent penalties for understatement of income.
As an example, at my practice I have children of as young as one year old receiving income from their family trusts. We complete a tax return once a year on their behalf as well as provisional tax returns.
It is important to note that all benefits distributed from trust needs to be distributed before March 1, or the start of the next tax year.
As long as you follow the conduit principle you are allowed to distribute to beneficiaries in whichever way the trustees deem fit, as long as this distribution remains in line with your trust deed.
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Small is a certified tax adviser and owner of Capstone Group. His company provides a range of services from bookkeeping, audits and tax services to secretarial and trust services. He is a self-proclaimed Jack-of-All-Trades who will admit that he is still not entirely sure of what he wants to do with his life. What he does know, however, is that he is not interested in taking employment; he wants to be an employer