For tax purposes, a trust is taken to be an entity in its own right. Therefore, even though the trustee is a company (or any other entity for that matter), the entity type of the trustee is irrelevant.

The trust can pay personal expenses but beware of Division 7A issues – for instance, if the trust has made distributions to a corporate beneficiary and owes the company an unpaid beneficiary entitlement, any monies owed by an individual to the trust (assuming the individual is a shareholder of an associate of a shareholder of the corporate beneficiary) at year end will be caught by the Division 7A provisions. In the worst case scenario, the monies owing will be treated as an unfranked dividend, which will attract tax in the hands of the individual.

If the personal expense is treated as a business expense (rather than through the beneficiary's current account as drawings), then FBT will be payable on the private expense.

No substantial advantage in getting the trust pay private expenses but for some potentially small benefits through the FBT system.

Eddie
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LOL. Yep, the 1936 Act is ridiculously convoluted.  The situation would indeed have been different if jc1979 becomes a non-resident but there will be a few hurdles for him to get over to make himself one (he already talked about coming back, etc).  If he becomes a non-resident,  his UK employment income wouldn't be caught by the Australian tax net at all, so it wouldn't be exempt income under s23AG, which means that it wouldn't reduce the negative gearing loss.

ipfreely – good luck with asking the ATO. They would probably ask you to formally apply for a private ruling, which will take months and months to resolve. Either that or they would give you their interpreation of the law, depending on who you get on the other end, which may or may not be legally correct.

Subdivision 36-A of the Income Tax Assessment Act 1997.

Agreed with Richard.

The standard instalment warrant arrangement costs at least $10K+. 

Be very careful with JVs involving super funds – it may potentially breach the most basic "sole purpose test", which could render your fund non-complying. In which case, drastically adverse tax consequences will arise.

A trust is a relationship – the trustee agrees to look after the trust assets for beneficiaries.  In a discretionary trust, the beneficiaries are usually not known until the trustee decides to make a distribution.  In tax though, a trust is an entity in its own right and in some ways, it is like a funnel – income goes in and comes out to beneficiaries as directed by the trustee.

I think it will be worthwhile for you to see an accountant, Kev, just so that you get a good understanding of these things.

Kev

A company is good to limit liability, so if you are buying the houses for development, as opposed to long term hold, it should do the job (you might even want to use a separate company for each project). 

However, a company is not eligible for the 50% CGT discount when a property is eventually sold, so if you are holding the property as a long term investment, a discretionary trust is usually a better way to go.

Obviously, tax is not the only consideration (eg, asset protection, matrimonial issues, estate planning issues, etc).  Should really talk to an advisor to consider what is best for you in your specific circumstance.

Eddie
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In my view, a HDT could potentially  work but there are a few critical threshold issues that must be dealt with with caution, including:

1. Valuation of the income units at redemption – The ATO may argue that these units have material value, given that they have been giving rise to a present and future income stream.

2. Reasons for the trust – It must be shown that the dominant purpose (or co-dominant purpose) of entering into the arrangement is not to obtain a tax benefit. I tend to think a lot of the more commonly cited "commercial reasons" put forward have not been tested and query if they would stand up in court (which you would try to avoid!).

3. Borrowings – Ensure that the holder of the capital units is not the borrower as interest incurred on a loan to buy capital units will not be tax-deductible. The question that arises then is – to what extent is the husband's interest tax-deductible considering he is borrowing to acquire the income units, rather than the property itself?

In a normal negative gearing environment, the owner borrows to acquire the property to enjoy both income and capital gains, and bear the risks of ownership in their entirety.  In a HDT environment, the income unit holder has effectively alienated the ownership and capital risk of the underlying property to someone else but are paying the same for just the income units.

In light of the fact that the splitting of income and capital rights is between husband and wife (related), query if borrowing and paying the same amount by the husband for the income units is commercial, ie, if you are borrowing and paying the same amount as if you were in a conventional negative gearing environment where you bear the ownership and capital risks of the property, could it be argued that some of the purpose of the borrowing under a HDT structure is attributable to something else?

Regardless of the technical arguments and issues, I think one needs to assess the cost benefit of putting together these trusts. For more simple affairs, even if you have a justifiable position, I would be averse to having an argument with the tax office in the first place, which is often costly and may erode or negate the benefit of having the structure.

Very  broadly, you would want a discretionary trust to protect valuable assets that will grow in value.  The trust will cater to both tax and asset protection needs.

A business should generally be run by a company because of liability risks.  The shares in the company may perhaps be owned by the trust (and your partner's own discretionary trust). 

If the business needs to use the assets in the trust,  the company can pay a market value "royalty" to use the assets.

This is very very general and must be tailored to your individual circumstances.

And those children become exceptionally tax effective when they turn 18 and don't earn substantial income because they will be taxed as adults under the normal marginal tax rates!

Apart from the provisions of the deed, which is of utmost importance, the redemption may give rise to some interesting issues, eg, potential CGT on redemption under the market value substitution rule, CGT event E4, direct value shifting, Part IVA (general anti-avoidance provisions, etc. Tread with caution in this area!!

Eddie
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