I have just been researching structures on the net. It seems there are conflicting views about which is the better investment vehicle. I tried searching posts for relevant info but couldnt find much specifics.
Could anyone give us the pros & cons for each? Maybe there should then be a link to the list so that the same question does not come up another 50 times ( I am probably the 50th person to ask the question)
heres a few facts I just found:
company pays 30% tax.
CGT index exempt (is that talking about inflation indexing?….indexing gone now anyway)
goodwill CGT exempt (thats a new one for me)
does not have to distribute profits (kind of like the negative gearing “compound effect” argument)
can split incomes the same as a trust can (I never put 2 and 2 together, obvious now…..isnt that the main benefit of a trust structure?)
Also, can someone explain a ‘company trust’?
Thanks
from ATO:
Trust
A trust is an obligation on a person to hold property for the benefit of others (who are known as ‘beneficiaries’).
The trust’s tax file number is used when the annual income tax return for the trust is lodged.
However, except in special circumstances it is the beneficiary, rather than the trustee, that is taxed. Usually the beneficiary has to include their share of the trust’s net income in their personal tax return (Form I). The trustee is liable to pay tax on income distributed to minor or non-resident beneficiaries, or on any income it accumulates.
The trustee needs to register for an ABN in its capacity as trustee of the trust. The trustee is taken to be an entity in that capacity.
Company
A company is a legal entity separate from its shareholders. For tax purposes, a company means a body or association, incorporated or unincorporated, but does not include a partnership or a non-entity venture.
A company needs to register for an ABN and for a tax file number.
Companies are regulated by the Australian Securities and Investments Commission.
A company pays income tax on its profits – the general rate of tax is 30%.
from another site:
Advantages of a trust include:
there may be taxation advantages – although this depends on current tax laws;
allows for income streaming;
limited liability etc.
The disadvantages of a trust include:possible implication for capital gains tax;
distribution of tax losses;
establishment and administration costs etc.Colonial First State warns investors that trust structures do not permit the flow-through for tax purposes of any capital loss accruing in the separate geared structure. This means unsuccessful gearing can result in a total loss of the original investment without any tax compensation.
This is, of course, why the government introduced a blanket restriction against gearing by super funds.
some good examples here:
http://www.myersbp.com.au/update/documents/october1998.pdf
In August 2002 all Family Trusts had to be amended. Otherwise you would automatically NOT be able to get the Capital Gains Tax Small Business Roll over relief. The relief reduces the CGT that your Family Trust has to pay when it sells its business.
It is common for trusts to make a company “presently entitled” to trust income without actually paying out the money. In this way, the trust can accrue income taxed at the 30 per cent corporate rate, which can be distributed via an asset revaluation to individuals who can then avoid paying “top-up” taxes to the 48.5 per cent marginal rate.
“Often parents who have accumulated wealth set up trusts to control that wealth,” Frost says.
“If anything happens to them and their children end up with substantial assets at 18, they may not be financially mature enough to handle it.
“Trusts are a good way of controlling wealth and protecting children from themselves,” he says.
Trusts are also very flexible, he says.
“They can elect where income can be distributed while in a corporate vehicle, the dividend goes to the shareholders with little flexibility,” he says.
“Also, only half of the capital gains on an asset held by a trust for more than 12 months, is taxable. Companies don’t receive this concession.”
The Australian
Crashy, I would say discretionary trust is the best structure. it allows for maximin flexibility and offers asset protection that a company doesn’t.
eg, say you owned some shares in a company and made $18,000. you could only distribute this in accordance with the shareholding, but with a trust you could disribute $6000 each to yor 3 cousins who are uni students and don;t have any other income and pay no tax.
And if you were sued, your shares in that company could be at risk whereas assets held in the trust wouldn’t.
if you had a business, you could run it thru a company, but the shares could be held by the trust. that way all profit could be diverted tot he trust.
Losses can’t be distributed from a trust, but I don’t think a company can do this either? They are carried forward though. One good idea is if you have a capital loss, set up a new trust and then any capital gains can be discounted 50% (if held more than 1 yr) and this gain can then be distrubted to the old trust. This minimised the CGT payable.
Trusts are also cheap to setup and are not regulated by ASIC, and running costs are minimal.
Terryw
Discover Home Loans
North Sydney
[email protected]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
Thanks Terry, im glad someone finally answered.
I am getting a few requests to include structure info in my course, which is why I am researching it. Being a little known strategy it is probably a good idea.
So the main benefit is asset protection, I always thought it was tax minimisation. From what I have read today it seems most of the tax advantages are no longer. I guess the discretionary part would be useful, then again if you are trying to build a portfolio a company can withhold all or part profits to avoid the tax. That could be very useful to some people who dont need to draw out from the investment.
When you say “you could disribute $6000 each to yor 3 cousins” do they actually have to receive the money? I would assume it is not an act of generosity, what happens if they don’t want to hand over the money? Do people usually give the relatives a cut? Money and relatives not a good mix in my experience.
Crashy
another point. The beneficiaries of a trust will usually include any company in which the trustee is a shareholder, director or other ofice holder. So you can set up a company later on and all profits could be diverted to that company.
It is my understanding that you do not have to actually distribute the money to the relatives, and jsut a journal entry will do, but in this case they may have a claim against the trust later.
There is a great book called “Trust magic” by accountant Dale Gatherum Goss.
I think the main reason for a trust is tax minimisation. You can distribute the include as you please and the recipient pays the tax. Trusts don’t pay tax (unless it is not distributed). protection is only incidental for me.
Terryw
Discover Home Loans
North Sydney
[email protected]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
“Trusts don’t pay tax (unless it is not distributed).” Is that possible? I thought a trust had to distribute ALL profits. If so, what is the rate?
hi terry and crashy
the other main advantage of a trust is assett protection.
In regard to undistibuted money according to Renton’s book “family Trusts” page 134 some money not distibuted for what ever reason will be paid out of the trust fund. but he doesn’t say the tax rate.
Crashy i also recomment Dale Gatherum Goss’ book trust magic.westan
Just found it in Dale’s book “if the trustee does not distribute those profits to the beneficiaries of the trust, then, the trustee will pay tax at 48.5% of the profit” p101 Trust Magic
westan
That’s my understanding as well (48.5%). But as Terry pointed out the distribution does not have to be a physical payment – just a journal entry in the trust’s records.
Rod.
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