Author Topic: Australia - Discretionary Trusts  (Read 3487 times)

Shaz_Au

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Australia - Discretionary Trusts
« on: April 21, 2016, 12:00:43 AM »
Hi,
Are there any Aussies able to share their experiences in setting up and running a discretionary (family) trust?

The main reasons we are looking at creating a trust are:  Income streaming, Asset Protection and Tax Planning

We are a married couple who currently have approximately ~$50K in index funds that are in a single name (lowest earner).  Our plan is to rapidly grow the amount in index funds that will form the majority of our FI stash.  This means we need to get the correct structures in place.

Appointer
Both of us so we are able to change the Trustee if necessary

Trustee
From my reading it looks like it would be best to set the trust up with a corporate trustee.  My reasoning behind this is that the trustee controls the assets and benefits derived from the trust but cannot be a beneficiary of the trust.  Obviously we both with to benefit from the trust (be beneficiaries) and have control over how the trust is run.  By having a corporate trustee we are able to control the trust by being directors (but not shareholders?) of the corporate trustee company.  Asset protection, by having a corporate trustee company that only has $5 in assets means it won't be a target to be sued.  By having the assets in a trust if we go bankrupt or are sued individually the assets are also safe.

Beneficiaries
The two of us would be named beneficiaries of the trust but I believe the trust deed can be written a way that we are also able to include other family relatives as a beneficiary as/if needed.
I don't know if we should be creating a "bucket" company and having it as a beneficiary as well? Can you create a provision for one when creating a trust but not implement it until later?  Is there a risk in doing this?
Charities and how they are included?  There are benefits regarding taxation of donations to charities made through a trust.

Bucket Company
This appears to add a lot of extra complexity but many of the benefits.  Currently we are in the 32.5 and 37c tax brackets.  One thought is that we can stream some of the trust income to a bucket company at the lower 30% tax rate and let this compound inside the company. You do loose the 50% CGT discount when selling an asset owned by the bucket company. For something like bonds or other income streams with smaller capital gains losing the discount may be less important.  Another alternative is to loan the money back to the trust using a Division 7A loan.  The bucket company could also pay dividends, have employees along with their deductions, extra pre-tax super contributions, etc.   All of these options add additional complexity, tax implications and reporting requirements!  Where is the sweet spot?

So if you have any feedback regarding creating, running, structures and costs of trusts along your experiences and tips I would love to hear from you!  Thanks :)

Bibliography
Aussie Firebug: http://www.aussiefirebug.com/pay-less-tax-part-1-buying-assets-in-a-trust/
http://www.moores.com.au/images/uploads/files/Family_Trusts.pdf
http://www.wealthsafe.com.au/wp-content/uploads/2015/08/The-Intelligent-Trust-Guide-20141.pdf
Various online sellers of discretionary trust documents
ATO website
BigchrisB's forum posts and the Australian Investing Thread on this forum!

PS I'd love to borrow a copy of the Trust Magic by Dale Gatherum-Goss if anyone has one, none of the libraries I have access to have a copy.
« Last Edit: April 21, 2016, 12:04:30 AM by Shaz_Au »

marty998

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Re: Australia - Discretionary Trusts
« Reply #1 on: April 21, 2016, 04:37:45 AM »
All sounds perfectly legit, until you realise the accountants fees will eat into a lot of the benefits :)

$50k is nowhere near enough to be worth it... 10x the amount would be my advice as the starting point.

Lets say between the both of you have $500k... $250k each... dividend yield of 4%... = $20k ($10k each).

Tax on 20k is max $7800 using your rates (including medicare levy). Tax @ 30% using bucket company is $6000.

The difference is $1800. Which is about how much you'd pay in increased accountants fees and ASIC fees for having the structure in place.

Of course, if you can stream income to people who currently have none then thats where the real benefits can be realised. Above is a very simple analysis. May or may not be applicable to you.

Curious to know why you think you need it for 'asset protection'. Who is going to sue you and for what?
« Last Edit: April 21, 2016, 04:42:34 AM by marty998 »

Adram

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Re: Australia - Discretionary Trusts
« Reply #2 on: April 21, 2016, 07:55:37 AM »
Discretionary trusts are great structures for all the reasons you stated. I use one myself. As Marty said, the accounting can be costly but doesn't have to be, and can be done yourself if you want to put the time into learning a bit.

Appointor/Principal - yes, should be both of you, may also want to set up alternates if something was to happen to you both.

Corporate trustee is best for asset protection, can both be directors and equal shareholders so if one of you gets sued, total control of trustee cannot be gained by another party.

Beneficiaries - Most trust deeds are written to include all relatives and associated entities of the named beneficiaries as beneficiaries, even if they don't exist yet.

Bucket companies - they sound good but are a massive hassle unless you are very disciplined. Div7A catches a lot of people out. The income streamed to the company does not actually have to be paid to the company, can stay in the trust. Lots of arguments about whether this creates a separate trust or not. Also extra cost for ASIC, company setup, tax preparation.

As Marty says the tax savings generally don't make a huge difference with a low amount in there but it's always good to begin as you want to continue I think. Also if a spouse drops to low income due to taking time out for children can save a lot of tax.The asset protection is the main thing for me though.

Setup costs - through an accountant a company trust setup will cost between $1,500 up to maybe 2,500... You can do it yourself for under $1,000 however but need to know what you are doing.

Shaz_Au

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Re: Australia - Discretionary Trusts
« Reply #3 on: April 21, 2016, 05:55:51 PM »
Thanks for the detailed replies!

Marty, I realise $50K is nowhere near enough, eventually there will be a lot more in there, e.g. we are looking to double that by the end of this year. It's about getting the structure right now so we aren't taking a massive CGT hit when trying to get it in place later.

You are right on the other bit though, we don't really need 'asset protection'.  The main reason for the trust is so the income can be efficiently streamed between ourselves if one us suddenly stops working, etc.  If not a corporate trustee then who would you make the trustee?  How hard is it going to be to change the trustee if required down the track?

Thanks for running the numbers regarding tax savings with the bucket company, helps demonstrate how small the savings might be for the extra complexity and costs required.

Adram,
It's always great to hear from someone who has been there and done that!
  • Thanks of the tip regarding the additional Appointor/Principal.
  • I thought there were risks in being a shareholder of the Corporate Trustee when it came to asset protection?  I guess that's your reasoning behind being equal shareholders.
  • Regarding the unpaid present entitlements to companies I believe they now have to be paid? ATO ruling from 12/09?
  • Do you have any resources regarding DIY setup of the trust?  I think I can manage the setup of company if we went with the corporate trustee but I'd have no idea who I should be using for the trust deed.  The deed wording seems to be the most critical part but how do you tell which provider (either local or online) is best?
  • We would be aiming to learn to complete all the required reporting ourselves, probably another cross against the bucket company

Please keep the useful information and discussion coming everyone





Adram

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Re: Australia - Discretionary Trusts
« Reply #4 on: April 23, 2016, 02:25:27 AM »
There's a few schools of thought with who should be the directors and shareholders of a trustee. If one of you are in a risky profession or business, then that person can be the risk individual and the other can be the asset individual, so the risk person would be director and the asset person would be the shareholder of the trust... And probably have the family home in their name.

Or, you can both be directors and shareholders, so if anything happens with one person, they can resign as director and no adversary can take control of the trustee as neither of you has majority ownership.

The div7A rules are to ensure that income cannot be taken out of a company as a loan that never gets repaid, which is what used to happen. With bucket companies people would make notional distributions then take that money out of the trust and use it, so the trust would owe money to the company, but the trust controllers would owe that money to the trust.
The ATO did crack down on that, but my understanding is that if you haven't taken the money out of the trust there is no deemed dividend to be taxed in your hands unfranked... Which is what everyone wants to avoid. I haven't looked at this in a while so maybe I'm mistaken, it's a complex area.

With trust setup, I would look at cleardocs.com.  I wouldn't worry too much about the trust deed wording, these are automatically written to give you as much flexibility as possible, while complying with current legislation around income streaming etc. Almost all trust deeds say virtually the same thing.

There are a few other providers who are also good, ReckonDocs for example... But they are all pretty much the same for a standard trust. You should look to set up the company and trust with the same provider, much easier.

You will possibly need to pay stamp duty and get the deed stamped depending on what state you are in. Also need to set up ABN and TFN for the trust, can do this online at abr.gov.au.

Final thought, if you are doing your own tax and compliance, you need to have made a distribution resolution by or on 30 June each year, likely before you have calculated the exact profits,or else the income can be taxed in the trustees hands at top tax rate.

Shaz_Au

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Re: Australia - Discretionary Trusts
« Reply #5 on: April 25, 2016, 04:38:46 PM »
Thanks again Adram, lots of great information there.  The more I read the more complex it seems to get!

I've got a silly question or 3.  If the distribution resolution is not made and the trustee foots the tax bill at the top tax rate; in the case of a corporate trustee is this still 30%? Do the funds continue to compound in the trust and the corporate trustee doesn't gain any value?  Could this be used to avoid needing a bucket company?

Adram

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Re: Australia - Discretionary Trusts
« Reply #6 on: April 30, 2016, 08:57:31 AM »
No, it's at the top marginal tax rate of 45%, irrelevant of who the trustee is.