Please advise instead of reflecting rental income, an income called “Recovery Income” is noted instead(see attached account 2900/001).This account does not exceed the expenses of the trust so no profits or losses incurred. To help reduce this loan , recov
Important:
This answer is based on tax law for the year ending 28 February 2020.
Answer:
Your reference to recovery of cost requires of us to comment on our previous response as it is possible that we may not have interpreted the facts correctly. A trustee of a trust, in his or her capacity as a trustee of the trust will not necessarily be a connected person in relation to the trust. We referred to it in our guidance, but we accepted that the trustee didn’t use the asset of the trust as a primary residence and wasn’t a connected person. It appears, if we read “due to it being your primary residence” with “there is a rental contract in place”, that it may well mean that a connected person was in fact using the property as a primary residence.
To state the principle again: if the trustee is a connected person in relation to the trust, and used the asset as a primary residence, then to the extent that the loan financed the acquisition of the primary residence, section 7C(5)(d) will apply. This means that section 7C will then not apply.
The “used that asset as a primary residence” phrase needs further elaboration. The words used in section 7C(5)(d) are, “the person referred to in subsection (1)(a) or the spouse of that person used that asset as a primary residence as contemplated in paragraph (b) of the definition of ‘primary residence’ in paragraph 44 of the Eighth Schedule throughout the period during that year of assessment during which that trust or company held that asset”. The full definition reads as follows:
'primary residence' means a residence –
(a) in which a natural person or a special trust holds an interest; and
(b) which that person or a beneficiary of that special trust or a spouse of that person or beneficiary –
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ordinarily resides or resided in as his or her main residence; and
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uses or used mainly for domestic purposes;
The person referred to in paragraph (b) above, is the person who holds an interest in the residence. For purposes of paragraph 44, 'an interest' means … a right of use or occupation … but excludes a right of a lessee who is not a connected person in relation to that trust.
Herein lies an interpretation problem. The “person referred to in subsection (1)(a)” is the connected person who advanced the interest free loan. This person is also a lessee, but is also a connected person in relation to the trust. This may satisfy the ‘use’-requirement.
You now introduced new facts. We didn’t respond to the can the trust “claim assessed loss if the expenses is more than the rental” question. Section 25B(5) and (6) deal with the treatment of the expenses that exceed the sum of the amount included in the income of the beneficiary as contemplated in subsection (4) and the taxable income of the trust as contemplated in subsection (5)(a). Where the trust is not carrying on a trade, the recovery of cost will not constitute the carrying on of a trade, section 25B(3) – (6) will not find application.
Note, one can’t merely reflect ‘rental’ as a recovery of cost. The disclosure must be as agreed on between the trustees and the lessee. A recovery of cost is mostly use where beneficiaries of the trust use trust property.
We shouldn’t comment on that, but we note that the amount recovered only will not exceed the expenses when one includes the interest paid to the bank. This may well mean that the loan from the connected person didn’t finance the primary residence.
We don’t understand how the amount recovered will reduce the loan from the connected person.