A family trust which developed property has recently been caught out by the taxman. They got one key tax assumption wrong and it cost them dearly.
Income tax rules divide “profit” into two categories: income and capital. If you make “income profit” the whole amount is generally taxed. If you make “capital profit” you can sometimes reduce the tax paid by half.
In this case, the trust assumed that the profit it made from selling property which it held for years and renovated was a capital profit. After all, they were held for a long time and some earned rent too.
The ATO said no. It called the family trust’s “investment” activities a property development “business”. The entire profit (rental profit and sale of properties) was deemed to be ordinary income. The beneficiaries of the trust are now to be assessed on the whole profit (not half) which is a huge tax difference. But if there are no beneficiaries entitled to this extra taxable income, it could get worse and the trustee pay tax at the top tax rate.
Sure enough this case had many details and specific facts, but the point is still there. Family trusts and their trustees, beneficiaries and controllers who invest in property need to re-assess their tax assumptions. Contact us today to discuss your situation.