Carrying forward significant capital losses can be a viable strategy for trustees wanting to offset gains and achieve tax savings in the near future.
This kind of strategy is suitable in circumstances where it is likely that younger members may join the fund or when members are considering switching back to the accumulation phase.
One way SMSF trustees can carry forward capital losses is to set up a small accumulation balance once their assets are realised at a loss.
Funds with assets which support pension and accumulation liabilities can use the unsegregated method to claim ECPI (exempt current pension income), as capital losses on unsegregated assets can be carried forward each year, even when a fund is completely in pension phase.
Trustees that realise losses may also want to consider whether having an unsegregated fund may be more beneficial than a segregated fund. Segregated funds hold separate asset pools specific to members or pension and accumulation balances. Unsegregated funds have one large asset pool and all members share the combined investment returns.
To claim ECPI in an unsegregated fund, an actuarial certificate is required each financial year. Since the fund will have a small accumulation balance, the income earned will not be entirely tax-free. However, the cost of paying a small amount of tax and obtaining an actuarial certificate may be offset by tax savings in the future which are obtained from carrying forward the capital loss.
Managing a trust comes with its share of responsibilities, especially regarding tax compliance.
To assist trustees and administrators, the ATO has provided a checklist that can be used to streamline the tax process. This is a crucial tool for ensuring that the trust’s affairs are managed efficiently and effectively in accordance with tax regulations.
Let’s delve deeper into what the Resolutions Checklist entails:
Distribution Resolutions: One of the primary tasks is to determine how income will be distributed among beneficiaries for the financial year. This resolution must be documented and finalised before 30 June to optimise tax outcomes for the trust and its beneficiaries. Trustees must consider each beneficiary’s tax position and financial circumstances when making distribution decisions.
Trustee Resolutions: Trustee decisions throughout the year, such as acquisitions or disposals of trust assets, loan agreements, or changes to the trust deed, need to be documented and ratified through resolutions. These resolutions serve as formal acknowledgments of the decisions made by the trustees and provide a clear record of the trust’s activities.
Trust Income Allocation: Trust income comprises various components, including assessable income, exempt income, and deductions. Trustees must accurately determine and record each component to ensure compliance with tax laws. Proper recording and reporting of income and expenses are essential for tax purposes and may impact the tax liabilities of both the trust and its beneficiaries.
Capital Gains Tax (CGT) Considerations: Trustees must review any CGT events during the year and determine the distribution of capital gains or losses among beneficiaries. CGT decisions can significantly affect the tax outcomes for both the trust and its beneficiaries, making careful consideration and documentation are essential.
Streaming Resolutions: Some trust deeds allow for income streaming, which involves allocating specific types of income to beneficiaries based on their individual tax preferences or circumstances. Trustees need to make resolutions to implement income streaming effectively, considering the trust deed provisions and tax implications.
Minutes and Records: All trustee resolutions and decisions must be documented in writing, including minutes of meetings and any supporting documentation. Proper record-keeping is crucial for demonstrating compliance with tax regulations and providing an audit trail of the trust’s activities.
Trust Deed Review and Update: Regular review and, if necessary, updating of the trust deed are essential to ensure that it remains compliant with current laws and regulations. Trust deeds should accurately reflect the intentions of the trustees and beneficiaries and provide a solid legal foundation for the trust’s operations.
Trustees can streamline the tax compliance process and minimise the risk of errors or oversights.
However, seeking professional advice is essential if you’re unsure about any aspect of trust management or tax obligations. With proper planning, documentation, and compliance, trustees can ensure that their trusts operate smoothly and remain compliant with tax laws.
Why not start a conversation with us today to find out how we could assist you with your trust documentation?
