Trust V Company

The primary benefit of a company is limited liability (if anything goes wrong, litigators can not pursue you personally). And the primary benefit of the trust is the ability to disperse income to a range of beneficiaries (ie: children). The two can operate in tandem, with a company as trustee for a trust.

The company itself pays a flat rate of tax @ 30%, but any income you 'draw out' (via dividends, or salary) will be taxed at marginal rates.

eg: the company makes $50k (profit before salaries) for 2 years, each year you draw a salary as director of $30k, and in the second year take a $40k dividend. In the first year, the companies profit is $20k, so it pays $6k in tax. Your personal income (if you have none from other sources) is $30k, so at marginal rates thats $2550. In the following year, on the company's $20k profit it will pay another 6k in tax, and then distribute you a dividend of $40k, of course, there's actually only $28k to distribute, so you'll get a franked dividend of $28k + franking credits of $12k = $40k. so your salary + dividend = taxable income of $70k. The tax payable on that at marginal rates is $15,600 but you've got $12k in credits, so the bill would only be $3600.

So in the second year, between yourself and the company you pay exactly the same amount of tax, as you would if the $70k was just personal income. The only advantage tax-wise is that you can use the company as a 'buffer' that is, only distribute the income to yourself in years when your in a 30% tax bracket.

There are considerable disadvantages to these structures which you need to be wary of. A company does not have access to the 50% discount for CGT. (A trust does) And neither entity can distribute a loss – that is, you wont be able to claim any losses against your other personal income.

Check out one of my recent blogs – Invest-for-Success

I am not an accountant but the information has come from a recent edition of National Institute of Accountants Magazine and will give you a little more of a heads up about it. It also references the article so you could contact the NIA or the Author.

Note: A discretionary trust is far more superior then a unit trust in regards to tax minimisationand capital gain tax- as it provides better control and flexibility..

End of the day you can really make a company ABC pty ltd..and it’s owned by a trust ABC….
Our firm dealt with a case where the couple had a company that was owned by other company..and that 2nd company was owned by a trust who it self was a beneficiary of a different trust 0.o

Cheers
Michael

I agree with scott..

remember that cash doesn't need to be distributed but profit does, so if the trust makes a profit of $100k, the cash it's earned can sit in the trust's bank account, but that $100k profit is distributed in the tax form to the beneficiaries.

There are also considerable asset protection advantages of using a discretionary trust.