SA What does it mean to have power to determine if money is treated as capital or net income?

[Dingo34]

Hi all, I am new to this forum and would like to say hello first, and follow up with a couple questions (of which I have a few) relating to my family trust. I would like to get a better understanding of concepts and clauses and laws etc relating to the trust deed before I engage my accountant (who is always so busy).

My first question is what on earth does it mean when the trust deed says the trustee has power to determine whether any money for the purposes of this Deed shall be considered as capital or net income...? (In another part of the trust deed is defines net income as within the meaning of Sec 95 of ITA Act 1936 or if the Trustee so determines any other generally accepted accounting method. )

Following up on that, why would a trustee decide to treat any money as capital instead of income?

Another question is, when I distribute income to beneficiaries, and assuming the obvious that I distribute it after 1st July 2021 (even though I have completed resolutions by June 30 2021) is this treated as the beneficiaries assessable income for the 20/21 FY year, or is it for the 21/22 FY?

Many thanks
Dean

 

[Docupedia]

These are more taxation/structuring questions than legal, but in basic terms:
1. & 2. Income has to be distributed, capital is accumulated back into the trust for growth. There are different taxation outcomes on either (e.g income tax vs capital gains). The power gives the trustee a degree of flexibility to pick an overall advantageous pathway depending on financial situation for the trust and its goals.

3. In most discretionary the election on distribution has to be made as at June 30, and there’s a mechanism for it to be apportioned to the ‘default beneficiaries’ however expressed if no election is made. This is because the trust has to deal with income in the financial year it is earned (i.e. 30 June). You can’t carry the income over to the next year, just the same as you can’t for company tax or PAYG.

 

[Dingo34]

Hey Docupedia, thanks for the response. I am still no closer to understanding why and how it would be used. Was hoping some simple examples might help me.

So let's assume I run a business through the trust, it's net profit at the end of the year is $50K. If I wanted to only distribute $30K to beneficiaries (this is a discretionary trust) and keep the remaining $20K in the trust and place it into a savings account earning interest, can this $20K be treated as capital? And if so, does this mean the trust is not going to have a tax liability for that remaining $20K? What if instead of putting it into a savings account, it was used to buy stocks? Same again?

If I am way off the mark with these two examples, is anyone able to offer an example or two of how income (say earned through a business in a trust) is treated as capital and why someone would want to do it?

Or, and please accept my apologies, but is this the wrong forum for these types of questions?

Cheers

 

[Docupedia]

Those are taxation type questions. The odds of getting a taxation specialist lawyer here are probably low, and even if you did they are likely to be highly specialised in a particular area of tax law. Your questions are probably at a ‘basic’ level (I‘m not meaning to degrade you in any way here - I don’t know the answer either).

Tax law is complex, changes often, and is more relevantly the domain of tax accountants.

Your best bet is to put this type of question to one of them. Where you might find an accounting forum I have no idea, I just ask my accountant.