Hi,
Can any of you Trust & Tax experts confirm whether my understanding of what a trust can do is correct.
Here are the scenarios which I want to confirm are true/correct.John Smith gift’s cash (20% of purchase price of attended property) to DFT
DFT applies for home loan with John Smith as guarantor
DFT buys residential property
DFT signs lease agreement with tenant
Each month John Smith gift’s difference between rent and repayments to DFT (holding costs)
DFT applies for Planning and Building permits for single dwelling in the backyard
DFT applies for construction loan with John Smith as guarantor
Dwelling in rear gets builtDFT sells front house and backyard house (front house receives 50% CGT as it was held for over 12months)
Profit is distributed to benefactors, who then pay tax at individual income tax rates
If the profit is not distributed in the same year it was earned, 45% tax is payment by the DFT
Is all the above correct?Can profits be distributed to a company (ltd pty) who then pay 30% tax and gift’s the money back to the DFT?
Thanks,
Scott
Pretty much on track, but.
DFT is not a legal entity, It is only a relationship. It is the trustee that enters into contracts.
John Smith could only act a guarantor if he was trustee, or director of trustee. There may be others required to give guarantees too.
Smith can loan or gift money to the trust.Benefactors are usually called beneficiaries.
A company can be a beneficiary, but this will depend on the wording of the deed. If it is a beneficiary then money can be distributed to it. A company can lend the money back to the trust, but there are complex rules regarding this – Division 7A rules. The terms of the loan and interest rate need to comply with the rules.
If you are doing a development then the 50% discount may not be available if the intention was to develop and sell.
talk to your advisors about this.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terryw,
Thank you, I'm happy to hear that my general understanding of what a trust can do is correct.
Is there anyway for the trust to retain the profits after selling the properties and reinvest without distributing to beneficiaries or paying 45% (or whatever the highest tax rate is)?
scotts wrote:Terryw,Thank you, I'm happy to hear that my general understanding of what a trust can do is correct.
Is there anyway for the trust to retain the profits after selling the properties and reinvest without distributing to beneficiaries or paying 45% (or whatever the highest tax rate is)?
I don't think trusts can retain income without having the trustee pay tax at the top rate. The trustee may have to distribute the money and the recipient gift it or lend it back to the trust.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
scotts wrote:Terryw,Thank you, I'm happy to hear that my general understanding of what a trust can do is correct.
Is there anyway for the trust to retain the profits after selling the properties and reinvest without distributing to beneficiaries or paying 45% (or whatever the highest tax rate is)?
The only way you could do this is if the distributions were made to the beneficiaries, and the beneficiaries loaned back their distributions to the trust. The beneficiaries would still have to pay tax on their distributions, though.
EDIT: Oops, Terry already said this. Must read all of post in future!
Terryw,
Can the DFT distribute to a beneficiary that is a SMSF (trust)?
thanks
Scott
Yes, the SMSF is a trust and could be a beneficiary of a discretionary trust. But there are many legal and taxation issues involved.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
okay well my parents are at retirement age and the 3 of us share a SMSF (built of cash and stock holdings).. so I will look into that angle.. thanks Terryw
If your parents intend to apply for centrelink benefits you need to be careful with trusts. Centrelink can deem the trust assets to be their own if they are a beneficiary or trustee or appointor or controller of a trust.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Currently with the holdings they have, they cannot receive any centrelink benefits.
Also could I not word the Trust so that family members can be a beneficiary with their name being spelled out?Example if I was part of the SMSF (not sure how to word it if only my parents are in the SMSF)
eg
any trust in which a beneficiary is appointor of, trustee or or unit holder of
Even if they are not named they would still be a beneficiary and it would affect centrelink payments. If they won’t receive any centrelink payments then it may not matter that much. If circumstances change in the future they can always renounce their status as a beneficiary and then qualify. Some lawyers argue that this could cause a resettlement of the trust though.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terryw your above posts about centrelink is actually a bit of a worry…
so just buy holding a property in a DFT with myself as the primary beneficiary, all other beneficiaries (even without their name spelt out) will have issues with centrelink benefits?
eg.
the sister of the primary beneficiary
the sister's children of the primary beneficiaryso both my sister and her children will have issues with centrelink benefits, even if they are not receiving income distributions?
possibly.
But in reality we are all beenficiaries of a number of trusts without knowing it. It would be impossible to tell centrelink something if we have no knowledge.
Here is some more info
http://www.centrelink.gov.au/internet/internet.nsf/publications/fis022.htm
http://www.centrelink.gov.au/internet/internet.nsf/trusts/index.htmI have never looked into this, but it is worth considering.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
http://www.centrelink.gov.au/internet/internet.nsf/filestores/modpt_1005/$file/modpt_1005en_p.pdf
This is the Centrelink notes for a private trust and the form needed to be filled out if you are associated with a private trust in anyway. It is very detailed and is 20 pages long.
Testamentary trusts could even trap someone.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
interesting read, i wonder how many people are linked to trusts without having any idea..
scotts wrote:interesting read, i wonder how many people are linked to trusts without having any idea..The majority of the population possibly!
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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