Trust and company structure

[Murdoch]

Hi, another Trust question.

in our discretionary Trust we have our shares (international). Beneficiaries are me, the mrs, and the kids. I am Trustee.
We are soon to buy an investment property on loan. Ownership and loan in Trust name.
Interest repayments, and other costs should be tax deductible in the Trust. Income from rent and shares dividends.

My accountant has suggested setting up a Company within the Trust and building Australian shares in this entity.
Franked dividends would be paid into the Trust, then distributed to beneficiaries.
He reckons this allows the for an improved tax position due to the franked dividends, but I'm a little confused as to how this works or will work in such a structure.

Can anyone shed light on why this is beneficial?
Why not just put the Aus shares in the basic Trust?

Cheers
Murdoch

[MrThatsDifferent]

You’re paying your accountant, why not get the clarity from the accountant and all of your questions answered? Then, find a second accountant and get a second opinion or listen to their explanation. Let experts do their jobs to help you and don’t ever be embarrassed to understand everything. Clearly you walked away confused from a service you’re paying for.

[mjr]

Well, the company entity will pay tax at 27.5% but can choose when to pay (pass on) dividends, whereas the trust must pass on dividends in the year they're received at the marginal rates of the beneficiaries.

Obviously the beneficiaries' taxable incomes and marginal rates are needed to complete the picture and see if you save money.

But yeah, ask your accountant.

[Murdoch]

Thanks.
I haven't paid anything yet:)

So the company can hold over payment of dividends to the Trust or just the tax liability?
How many consecutive years can that continue?
If dividends are immediately reinvested, how does that affect allocation to the Trust and onto beneficiaries?

[mjr]

A big difference between companies and trusts is how they deal with income.  Companies don't need to pay dividends, they can retain profit as long as the directors like - of course they pay company tax on profits, building their own franking credits in the process.  "Retain" includes reinvestment of dividends.

[marty998]

So if the Trust is a shareholder of the Company.... you are aware that any assets owned by the Company will not be eligible for the 50% CGT discount?

Now this might not worry you if you are going to own assets forever and then have the company distribute out profits when your marginal tax rates are lower in future, but in the meantime tax is going to be paid at 30%*.

I hope you are also getting legal advice on the land tax consequences of holding investment properties in different structures.

*

Well, the company entity will pay tax at 27.5%

The tax rate is 30% for companies deriving more than 80% of their income from passive income sources. For eligible businesses the corporate tax rate is actually 26% for 2021 and 25% for 2022.

See here: https://www.ato.gov.au/Rates/Changes-to-company-tax-rates/

[mjr]

Good to know, thanks Marty

[Murdoch]

Thanks Marty,

This advice is what I am seeking formally, but bouncing here also.
We have a discretionary trust that hold shares only at present. Dividends are only income, and distributed to wife and kids for tax optimisation.
We have an investment property in my wife's name. Fully paid. Positive income: rent minus expenses. Her passive income is now in the taxable zone, but cost of managing the investment property mean net is zero tax.

We are buying another investment property on mortgage. I sought advice on putting into Trust or one/both our names.
As it will have high interest repayments, and overheads, it will be negatively geared. This one is much more expensive.
The long term plans for the house are unknown at present. It has the potential to develop by carving off one of the 4 titles deeds into a separate property. It is otherwise a good rental property as is.

As I am unsure what our long term plans would be, the accountant suggested it be placed in the Trust. Loan also in Trust and bank happy with this.
I'm aware I'll pay more land tax.
The issue with this is that the income in the Trust alone (share dividends and rent from this house) will only just nudge tax threshold, so I'm not sure I'll be optimising the negative gearing.
The Trust ownership does open more possibilities in terms of minimising tax if we develop in future then sell part of the property etc...
The other option is to put it in my name, and tax deduct all expenses against my income which is at the top rate. Unfortunately any sale or development in the future if I'm still working will not be tax friendly.

Still doing my research...
Any advice welcome.

Cheers
Murdoch

[marty998]

Thanks Marty,

This advice is what I am seeking formally, but bouncing here also.
We have a discretionary trust that hold shares only at present. Dividends are only income, and distributed to wife and kids for tax optimisation.
We have an investment property in my wife's name. Fully paid. Positive income: rent minus expenses. Her passive income is now in the taxable zone, but cost of managing the investment property mean net is zero tax.

We are buying another investment property on mortgage. I sought advice on putting into Trust or one/both our names.
As it will have high interest repayments, and overheads, it will be negatively geared. This one is much more expensive.
The long term plans for the house are unknown at present. It has the potential to develop by carving off one of the 4 titles deeds into a separate property. It is otherwise a good rental property as is.

As I am unsure what our long term plans would be, the accountant suggested it be placed in the Trust. Loan also in Trust and bank happy with this.
I'm aware I'll pay more land tax.
The issue with this is that the income in the Trust alone (share dividends and rent from this house) will only just nudge tax threshold, so I'm not sure I'll be optimising the negative gearing.
The Trust ownership does open more possibilities in terms of minimising tax if we develop in future then sell part of the property etc...
The other option is to put it in my name, and tax deduct all expenses against my income which is at the top rate. Unfortunately any sale or development in the future if I'm still working will not be tax friendly.

Still doing my research...
Any advice welcome.

Cheers
Murdoch

Seems like you are trying to have your cake and eat it too.

Wait for the moment the kids grow up and ask you to vest the trust. Put your Trustee hat on, what will you do? Take legal action against them? :D

[Murdoch]

Cake can't just be for looking at:)

Wouldn't any discretionary Trust with offspring as beneficiaries suffer the same risk when they reach adulthood?

[marty998]

Yes. Everyone uses the bullshit excuse of asset protection to set up a trust in order to simply save tax.

The real risk of asset loss is not from bankruptcy or creditors…. It’s from the adult kid beneficiaries 😀

Very publicly played out by the Rineharts for example.