If you are considering the winding up of your existing Trust as the compliance with the new Trusts Act 2019 seems untenable, a careful review of your particular trust situation should be made.
In addition to the tax implications which may arise (detailed below), a question should be asked as to who is in line to receive the assets of the trust upon winding up.
As a general rule the assets on winding up of the Trust are distributed to the final beneficiaries. The question is whether you are the beneficiary that is entitled to such distribution. If answer to this is no, then perhaps variation to the Trust Deed may need to be made first before proceeding with winding up. Alternatively a distribution of most of the capital be made prior to winding up.
From Tax perspective
Winding up or a resettlement gives rise to a disposal of trust assets with corresponding income tax and GST implications which include:
- Winding up or resettlement is treated as a disposal at market value which gives rise to immediate depreciation recovery for depreciable property.
- Taxation of gains for any revenue account property or property subject to Bright line Rules.
- Taxation of gains for land that is tainted by association where the land is not held for less than 10 years.
- Disposal or resettlement of residential land, may be subject to bright line rules for the recipient if the land is disposed within 5 years, unless the recipient could rely on the main home exemption.
- If the Trust has tax losses these will be lost upon winding up or resettlement.
- If the Trust holds shares in a company, such shares are deemed to be disposed which may give rise to loss of imputation credits and losses carried forward by the company. Furthermore, such disposal of shares could give rise to application of bright line rules for a land rich company in certain circumstances.
- From a GST perspective the winding up & resettlement is a taxable supply which is deemed to be at market value. Unintended GST consequences can arise if due care is not exercised.
You should seek advice from both your Accountant and your Lawyer before you make the decision to wind up your Trust.
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Article by Martina Evans, the tax expert from Roberts & Associates.