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Trusts and estates: Explaining the important concepts
Generally, if a trust's expenses are greater than its income it will have a loss for tax purposes. This tax loss will be a loss of the trustee and can't be passed to beneficiaries to offset against their income, except in limited circumstances. Losses can be passed to beneficiaries if they have a vested interest in the trust property from which the loss arises.
If a trustee suffers a tax loss in an income year, they can use it to reduce their taxable income in the next year.
However under the bright-line test for residential property, if a trust has bought/acquired a property and sold/transferred it within a five year period (two years for property bought/acquired on or after 1 October 2015 through to 28 March 2018 inclusive) any loss from the sale/transfer can only be offset against trustee net income from other residential property sales. A record of any excess deductions will need to be kept in case there is a taxable property sale in the future.
The bright-line test only applies to properties purchased on or after 1 October 2015.
How to claim tax losses
To claim the loss the next year the trustee will have to file an IR6 return. There are boxes in the IR6 form to disclose the loss and the amount claimed.
After a trust files an IR6 return reporting a loss we will send the trustees a letter which tells them the amount of the loss that can be brought forward. Generally this is the amount that should be entered in the IR6 return the next year. However, this amount may have to be adjusted if the trust has:
- had an audit or made a voluntary disclosure which changed the amount of loss available; or
- used part or all of its loss to pay tax debts or shortfall penalties.
Losses can be carried forward by trusts from tax year to tax year until the loss is fully used or the trust is wound up.