Author: trades(Newbie)Newbie 16 July 2024
Husband & Wife are trustees for a unit trust holding one negatively geared investment property, originally purchased for $600k, now worth $1 million. Every year the tax losses have been quarantined in the unit trust, now being $250k in carried forward tax loses built-up income losses in the unit trust. All the issued units of the unit trust are A Class units with both Capital Entitlement and Income Entitlement. These units are owned by the Husband as trustee for a hybrid trust. The hybrid trust has only issued income units, with the Wife being the holder of all the income units on issue. The capital of the hybrid trust is yet to be allocated to anyone.
1. If all the units of the UNIT TRUST were redeemed from the hybrid trust and issued to the Wife, would CGT usually get triggered on the market value of the property ($1 million) held by the unit trust? A $400k capital gain.
2. Are there any other ways units can be redeemed, for example, at the purchase price of the property or at CPI or below the market value of the property with the commercial reason being the redemption of the income units were at a value less than the property value because the income units may not be valued at the same value as the property which includes 100% of all rights and benefits?
3. If all the income units of the HYBRID TRUST (but not the units of the unit trust) were redeemed from the hybrid trust and issued to the Wife, would CGT usually get triggered on the market value of the property ($1 million) held by the unit trust? A $400k capital gain.
4. Transferring units or redeeming and re-issuing units - Are there any difference tax wise in the above scenario?
5. In the original scenario, the Husband is the trustee for the hybrid trust. All income units are owned by the Wife. If the Wife passes away and her Will gives everything to the Husband, the Husband would own all the income units. Will this cause a "Doctrine of Merger" trust merger of the hybrid trust causing the hybrid trust to cease existing, due to the trustee and beneficiary being the same person? Does this trust merger of the hybrid trust cause CGT to be triggered?
6. In the original scenario, what if the unit trust had a Doctrine of Merger" trust merger causing it to cease existing, due to the trustee and beneficiary of the unit trust being the same person. Does this trust merger of the unit trust cause CGT to be triggered?
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Author: Matt_ATO(Community Support)Community Support 21 July 2024
Howdy @trades,
Okay, this is a long one but I have covered everything!
1.0 Redemption of Units in the Unit Trust: Capital Gains Tax (CGT) Implications:
- When units in a unit trust are redeemed, CGT may be triggered if the units were acquired after 19 September 1981.
- If all the units of the unit trust were redeemed from the hybrid trust and issued to the Wife, CGT would usually apply to the market value of the property held by the unit trust (in this case, the $1 million property). The capital gain would be calculated as the difference between the market value and the original cost base (i.e., $1 million - $600,000 = $400,000).
- The Wife would be liable for CGT on this capital gain.
2.0 Alternative Redemption Methods:
Units can be redeemed at various values, including:
- Purchase Price: Redeeming units at the original purchase price of the property.
- CPI-Adjusted Value: Redeeming units at a value adjusted for inflation (CPI).
- Below Market Value: If there’s a commercial reason (e.g., income units not valued the same as the property), units could be redeemed below the market value.
The specific method chosen should align with legal and commercial considerations.
3.0 Redemption of Income Units from the Hybrid Trust:
- If only the income units of the hybrid trust (not the units of the unit trust) were redeemed and issued to the Wife, CGT would not usually be triggered on the property held by the unit trust.
- The Wife’s CGT liability would depend on the value of the income units redeemed.
4.0 Transferring Units or Redeeming and Re-Issuing Units:
- Tax implications may vary based on the specific circumstances and the chosen method.
- Seek professional advice to determine the most tax-efficient approach, due to existing taxation strategies that may be in use.
Doctrine of Merger and Trust Mergers:
- If the Wife passes away and her Will leaves everything to the Husband, the hybrid trust could merge due to the trustee and beneficiary being the same person.
- Whether this merger triggers CGT depends on the specific details, once again best discussed with a tax professional that understands you financial position.
6.0 Unit Trust Doctrine of Merger:
If the unit trust experiences a “Doctrine of Merger” (trust merger) due to the trustee and beneficiary being the same person, it could cease to exist.
CGT implications would once again depend on specific financial position info.
Author: trades(Newbie)Newbie 23 July 2024
1.0 If all the units of the unit trust were redeemed from the hybrid trust and issued to the Wife, CGT would usually apply to the market value of the property held by the unit trust (in this case, the $1 million property) - Is this exactly the same if the redeemed units from the hybrid trust were to be issued to the Husband, instead of the Wife?
2.0 Alternative Redemption Methods: Units can be redeemed at various values, including: Purchase Price, CPI-Adjusted Value, Below Market Value - How is CGT calculated on all these 3 methods of redemption, based on the original property purchase price of $600k, now worth $1 million? Is CGT still based on the $1 million current value of the property?
3.0 Redemption of Income Units from the Hybrid Trust: The Wife’s CGT liability would depend on the value of the income units redeemed. - What would the income units of the hybrid trust be valued at?
Author: trades(Newbie)Newbie 24 July 2024
1.0 Redemption of Units in the Unit Trust: Capital Gains Tax (CGT) Implications: CGT would usually apply to the market value of the property held by the unit trust - Will a registered valuer need to do a valuation of the property held by the unit trust? Can a real estate agents market appraisal be sufficient?
