Trading Trust w Corporate Trustee buying IP

First of all – congrats on getting your business cranking and generating a nice juicy profit AND excess cash flow!

Generally, you should keep your business interests and your investment assets legally separate. 

This means buying any assets in a different name i.e. a different trust, super fund or a beneficiary / spouse who is not a director of the trustee company.

Whatever you do, you will be paying some tax.  Your goal is minimise that tax as much as legally possible and use it to build your wealth.

WARNING: Business advise rant:
Also, before rushing in and investing that money, ensure you have sufficient cash reserves in the business – if anything the last 2 years has taught us (and is still teaching) is that business that have a strong cash buffer will not only survive through the tight times / downturns – but they will rebound stronger.  I see too many small business owners ripping cash out of their businesses and sentencing them to a slow and cash-strapped death!

Reinvest back into your business wherever possible.

***Business advice rant over***

Back to your potential issue with a nice big profit (taxable income) in your trust:

– Firstly work with your accountant to do things to minimise the taxable (on paper) income / profit in your trust.  I have written something relating to 2009 tax planning here. Obviously a few things have changed (i.e. tax bonus on asset purchases expired) – but most is still relevant

– The great thing about the trust structure is the flexibility to distribute to beneficiaries in the most tax effective way – this could be yourself and your spouse / partner but also children, nieces/nephews under 18 – $3,333 each for the 2011 (current) tax year with $0 tax and they don't need to lodge a return

– 30% is the rate of tax if the income is between $37,000 and $80,000 – so your goal is to keep the taxable income for yourself personally (and your spouse if applicable) under the $80,000 mark.  This also helps (but not essential) with finance applications down the track – you want to show good income for finance serviceability purposes.

– You should max your super contributions – even if you are younger – tax deductible and can be used as a deposit for investment properties (only with a SMSF) – as far as I know this is the only way to get a tax deduction for a capital purchase such as a property (or at least only pay 15% tax on the money)

– You can distribute to a company and only pay 30% flat rate on the amount distributed, however be aware that you physically need to pay the cash to the company otherwise you will get into trouble with Div7A / UPE issues (sorry – accountant lingo) – what you need to know is that you need to pay the cash to the company if you distribute from the trust otherwise you will get slugged with a huge amount of tax.  

– You can lend the money that goes into the company receiving the trust distribution back to either the business or yourself, however the loan needs to be at commercial rates / conditions otherwise the nasty tax problem as above.  The way the law works with these loans however is that no interest or minimum repayments are required if at the end of the financial year the loan is repaid in full. This means so long as the money is back in the company account at 30 June, you have use of that cash for 364 days of the financial year – this can be useful for dropping it into a mortgage offset account or line of credit to reduce interest on a home loan etc – but ensure you repay it at the end of the year.  Anyway – this is a complex area so talk to your accountant

I could go on and on about this, however I believe you need to keep an eye on your priorities and any tax planning should be dependant on the following (in this order):

1. Keeping your business cranking with a good cash reserve / cash flow
2. Keeping it simple – sometimes paying a couple of thousand less in tax is often NOT worth the effort
3. Purchasing some other cash flow producing assets (such as property)
4. Protecting your non-business assets – i.e. asset protection

I hope this info helps

Please feel free to throw out any additional questions to myself and the other forum members, and even come back and keep us updated.

Just realised I probably didn't answer your question.

 OK – no you can't purchase property using pre-tax dollars with your trust.  Distribute the income to beneficiaries, pay tax and then purchase either in personal names (if will be negative geared) or in a separate / new trust (with corporate trustee) if positively geared and/or if asset protection is a concern.

Good luck with everything!

Evolve