SMS Question

Posted On: Thursday, October 12, 2017

QUESTION

In 1984 we bought a small grocery store unable to pay its lease commitment, from that we grew and expanded. We bought land and built a 700sq m building in 2003 and started trading in the new building in 2004. We transferred the existing business to the new building, for family reasons we sold the business paid the loan on the building, formed a family trust and a Company to operate the trust. The lessees paid lease payments into the trust which distributed its funds in accordance with the trust deed. The trust owes the wife and myself approximately 1 Million $. We did not claim or have received interest payments on the money. Our financial situation has changed considerably early this year.

The lessee went very badly, we exercised the landlord’s right, re-entered the building, spent our funds and borrowed money, and our time without pay to re-establish the business and sold the business to new lessees on the 28-08-2017 on a 10 years lease.

We repaid borrowings to the bank. Because of our changed finances, can the family trust repay part or all the money owing to us without us having to pay tax on that money?

Asset protection issue 0088 on page 9, question 5 you address a similar case, our accountant does not share that opinion. Your answer and direction will be most appreciated.

Answer

I think you and the Accountant may be at cross purposes.

Let’s apply the answer (in italics) in issue 88 to your circumstances.

“The advance (and subsequent return) of loan funds is on capital account and will not affect your taxable income.”

This applies to you…in the meantime…

“However taxable income needs to be distributed to the beneficiaries”

The fact that a loan can be repaid to you tax free does not stop the trust having a taxable income.

To have been able to sell the rejuvenated business at a capital gain, it is clear the business made a profit.

Just because you are able to identify the cash taken out of the trust as a loan repayment does not stop the trust having a taxable income.

To avoid trustee tax (47%) this taxable income has to be distributed to beneficiaries.

 

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