Find out why using Trust to own investment property – Recouping tax losses
Any negative gearing loss generated by a property owned by a trust is usually trapped in the trust, unless the trust has other income to offset the loss. While the trust can theoretically carry forward tax losses for an indefinite period, the losses can only be recouped if certain trust loss recoupment tests are satisfied under the ‘trust loss provisions’.
Any negative gearing loss is usually trapped in the trust. The same applies to any capital losses incurred by the trust.
For a discretionary trust, the trust loss recoupment tests may be simplified by way of the trust making a ‘Family Trust Election’, but once the election is made, and a trust distribution is made to an outsider who is not part of the family group for which the election is made, the Family Trust Distribution Tax will apply.
For a private closely held unit trust, the trust loss provisions generally allow a unit trust to recoup tax losses if the majority unit holders of the relevant trust continue to own the units of the trust from the start of the loss-making year to the end of the loss recoupment year. However, this test is only relevant if the unit trust is a ‘fixed trust’.
For quite some time, it was assumed that most unit trusts were fixed trusts until a number of relatively recent legal precedents suggested that it was extremely difficult from a technical point of view for any unit trust in Australia to qualify as a fixed trust.
As a consequence of these common law cases, there is now an increasing risk that unit trusts with carried-forward tax losses would not have been or will not be able to recoup tax losses (unless they make a Family Trust Election, which may not be appropriate if the unit holders are not part of the family group).
To that end, there is no need to be alarmed at this point, as the ATO, as an administrative practice, will still treat a unit trust as a fi xed trust (provided that the trust deed includes certain provisions to ensure that dealings in the units of the trust are required to be effected at market value). Nevertheless, watch this space as the technical position of the law will need to be reconciled with commercial practice sooner or later.