If the beneficiary never receives payment from the trust, they may want to write their entitlement off as a bad debt, and claim a tax deduction The ATO has released a Taxation Determination explaining their view that there is no ability to claim a \u2018bad debt\u2019 deduction where a beneficiary of a trust writes off as a bad debt an amount of a UPE.<\/p>\n
This is because of the technical wording of the tax legislation regarding claiming deductions for ‘bad debts’, which requires the debt (e.g., the UPE) to have been previously included in the beneficiary’s taxable income \u2013 however, a beneficiary is not taxed on the UPE itself.<\/p>\n
Instead, the amount of the UPE is used to calculate the amount to include in their assessable income (and this may be different to the actual amount of the UPE). Example Archie Pty Ltd (\u2018Archie\u2019) is a beneficiary of the Linus Family Trust (\u2018Linus\u2019), which rents out a property. In the 2014 income year, Linus\u2019s trust income (made up of net rent) was $25,000, but its net (taxable) income was actually $20,000 (thanks to a ‘capital works deduction’ of $5,000).[\/vc_column_text][divider line_type=”Full Width Line” line_thickness=”5″ divider_color=”extra-color-3″ custom_height=”10px”][\/vc_column][\/vc_row][vc_row type=”in_container” full_screen_row_position=”middle” column_margin=”default” column_direction=”default” column_direction_tablet=”default” column_direction_phone=”default” scene_position=”center” text_color=”dark” text_align=”left” row_border_radius=”none” row_border_radius_applies=”bg” overflow=”visible” overlay_strength=”0.3″ gradient_direction=”left_to_right” shape_divider_position=”bottom” bg_image_animation=”none”][vc_column column_padding=”no-extra-padding” column_padding_tablet=”inherit” column_padding_phone=”inherit” column_padding_position=”all” column_element_direction_desktop=”default” column_element_spacing=”default” desktop_text_alignment=”default” tablet_text_alignment=”default” phone_text_alignment=”default” background_color_opacity=”1″ background_hover_color_opacity=”1″ column_backdrop_filter=”none” column_shadow=”none” column_border_radius=”none” column_link_target=”_self” column_position=”default” gradient_direction=”left_to_right” overlay_strength=”0.3″ width=”1\/1″ tablet_width_inherit=”default” animation_type=”default” bg_image_animation=”none” border_type=”simple” column_border_width=”none” column_border_style=”solid”][vc_column_text text_direction=”default”]Archie was made presently entitled to 100% of the trust income (i.e., $25,000). As a result, it was also assessed on 100% of the net (taxable) income of the trust (i.e., $20,000).<\/p>\n
The $25,000 was not paid to Archie (i.e., it was recorded as a UPE) and was invested by Linus in a related entity, but during the 2017 income year it was clear the investment had failed and was now worthless. Archie was now well aware that Linus was no longer in a position to satisfy the UPE and wrote the $25,000 off as a bad debt.<\/p>\n
Can Archie claim a deduction for the bad debt? No. While the debt is clearly bad and has been written off as such, no part of Archie\u2019s UPE (of $25,000) was included in its assessable income. Rather, Archie included its share of Linus\u2019s net (taxable) income of the trust (i.e., the $20,000) in its assessable income.[\/vc_column_text][\/vc_column][\/vc_row]\n","protected":false},"excerpt":{"rendered":"
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