Hi there all,
I have a tricky question?
We have a family trust, Discretionary. Within the trust is a P/L company which buys the property As trustee of the family trust.There are 2 adults and two infants included in the trust.
Now here’s the hypothetical; lets say we earn $200K in a finacial yr, they distibute maximun allowable funds to the kids (i think is $700 each) and the rest between the 2 adults ($99,930.00) each.
So does that mean that we fall in to the appropiate tax bracket for $99,930.00 hence 42% tax????
I was told by someone that there is way to set up a structure to never pay over 30%???
Is this fact?Thanks in advance.
John[biggrin][biggrin]
Just distribute the amount to yourselfs so that you pay no more than 30%, and the rest to a company which will pay 30%.
Terryw
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Parramatta
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Thanks TerryW,
After speaking to my accountant I was told that i would have to pay the higher tax percentage and made no mention about leaving funds to the company?
Maybe i miss understood her?
John [biggrin][biggrin][biggrin]
A family trust can only distribute funds to family members. A discretionary trust can have a bucket company capping your tax at 30%.
This is why I do not set up family trusts.CATA
Asset Protection Specialist
[email protected]Cata is technically correct, however, the term “Family Trust” usually refers to discretionary trusts. I doubt that anyone forming trust these days would form a discretionary trust limited to family members only, however, there are a lot of accountants out there who do not know anything about trusts.
If John’s trust is in fact a discretionary trust with beneficiaries limited to family members only, then it may still be possible to distribute to a company controlled or owned by family members.
John, just have a read of your deed. Look under the beneficiaries section, and see if it includeds any company in which a beneficiary is a director, shareholder etc.
Terryw
Discover Home Loans
Parramatta
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This should be seperate from the Trustee Company as well shouldn’t it?
“Money is a currency, like electricity and it requires momentum to make it Effective”
Count The Currency With This Online Positive Cashflow CalculatorYes Redwing, the company should be seperate from the trustee company. You might also be able to distribute funds to another trust.
Terry, If the trust can distribute funds to anyone or entity then it is a discretionary trust, if it can only distribute funds to family menbers then it is a family trust.
CATA
Asset Protection Specialist
[email protected]Thanks all for your responses!
I’ll check my deed and take it from there.
So if the company is mentioned under the beneficiaries section, then funds can also be distribited to the company at a tax rate of 30%???
Thanks Again
John
John
If a company is mentioned, then you can probably distribute (depends on wording and shareholders etc) to the company. The company then pays tax on this money. The company rate is 30%.
Cata, I was trying to say many people often call discretionary trusts “family trusts”. Technically there may be a difference, but this is often the case. see for instance http://www.lawcentral.com.au where their discretionary trust is listed as a family trust.
Terryw
Discover Home Loans
Parramatta
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Just send me a blank email, with “subscribe†in subject line.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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I would assume then Terry that the lawcentral website is incorrect. It may be commonly called a family trust, but why not just call it by it’s correct name to save confusion.
I’m not having a go at you Terry but it’s the details that makes the difference between a trust deed and a good trust deed.
I also use to be an engineer so I look at the details.
CATA
Asset Protection Specialist
[email protected]Hi all
Excuse my ignorance in this area but what happens next?. I mean you distribute some of the income to a company but then how do you actually get to use the money.
Can you get it out of the company somehow or is it necessary that your next investment be bought by the company?
Hope this doen’t sound too stupid. [confused2]
Elka
Hi Elka,
Don’t stress too much, I’m still trying o figure that one out myself [biggrin]
What happens next? Well, the money belongs to the company, not you. If you want to use that money yourself you would have to pay yourself a wage (and maybe more tax) or distribute it to the shareholders (again probably yourselves). You could jsut leave the money there, and it is possible for your company to lend money to yourself or to lend money to your trust for more properties. All these loans have to be set up correctly or the ATO could deem them to be dividends and you will have to pay tax on the amounts.
Terryw
Discover Home Loans
Parramatta
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So then can you distribute the income of the company to yourself as a franked dividend assuming the company has already paid tax on that income?
Thanks,
Steve (YI)“Knowledge is Power”
Just wondering a couple of things here..
There are 2 adults and two infants included in the trust.If the infants are beneficiaries willyou then have to get thier signatures on anything once they hit 18?
Now here’s the hypothetical; lets say we earn $200K in a finacial yr, they distibute maximun allowable funds to the kids (i think is $700 each) and the rest between the 2 adults ($99,930.00) each.$200,000.00 is a LOT of Profit/Income [blink]
“Money is a currency, like electricity and it requires momentum to make it Effective”
Count The Currency With This Online Positive Cashflow CalculatorOriginally posted by YoungInvestor:So then can you distribute the income of the company to yourself as a franked dividend assuming the company has already paid tax on that income?
“Good question but even if you can, what have you gained? You will still need to pay the difference between the 30% company rate and your 42 % rate. ….. unless you live overseas ……in which case you will have different problems depending on your country of residence.
I guess the company lending it to you or to your trust is the best option? The interest you pay it then attracts 30% tax and if your maths is good then you make sure that you deduct it as an expense at the 42% rate. ?
I’m still scratching my head here. It seems to me that eventually you will have to pay full tax if you ever want to spend any of it? [glum]
Does any one know if this stuff is fully explained in “bib and bub” terms in either wealth guardian or Trust magic?
Thanks
ElkaYep, if your company pays you, then you will have to pay tax if your tax rate is higher than the company rate.
There is no way around this if you only have yourselves as beneficiaries. You could possibly claim some expenses if you could justify this. eg employing other people. company car etc. But if the expenses are not related to the company’s profit making activities, you may have a hard time justifying it.
This is not covered in any of those books to my knowledge.
Ideas anyone?
Terryw
Discover Home Loans
Parramatta
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Just send me a blank email, with “subscribe†in subject line.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Why can’t you use the exess funds distributed from the trust to another entity (company or another trust) to use as a deposit on another IP, or other investment that is perhaps -ve geared.
Remember that you have already distributed up to the 30% tax bracket to yourself and the rest is (for me anyway) for investment, business etc.
How much do you need to live on?
CATA
Asset Protection Specialist
[email protected]hi
Isn’t all this advice a bit old hat now.
With the new tax rates coming into affect as of july 1st 2006, it makes trust and companies a bit parse
Heres an extract from Kel Fitzalan…Deloitte Tax Service partner.
” With the new mariginal tax rates, individuals will be able to earn about $150,000 before the effective tax rate on their income exceeds the 30% company tax rate.
The combined income for a couple invovled in a business can be up to $300,000 , before it becomes more effective to use a company.
If you use a trust, you can vary the income distributions to those beneficiaries who will pay less tax”so there you have it, from a tax expert.
Now JL
Is setting up the company and the trust and be able to pay your kids ($700 each) really worth the expense??????Afterall , how much to setup $$$$$$
how much to administrate $$$$$$$
are you paying to much $$$$$$$, for nothinghb
Tax issues are not the only benifit of trusts HB, and what if you could keep your taxable income in an even lower tax bracket.
The way I read the extract, it does not at all say that using a trust is outdated. If 81% of pollies use trusts do you really think they will loose there benifits?
CATA
Asset Protection Specialist
[email protected]
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