DIY Trust Administration

[spiderpig]

Hi All,

Long time stalker - first time poster.

I am investigating alternative structures for a proposed business venture. My accountant has strongly recommended a trust structure over a partnership or sole trader - mainly for liability reasons.

Is it practicable to administer a trust without involving your accountant?

From what I can determine the requirements for a "simple" trust are not that much more arduous than a personnel tax return ? and I managed to do my own returns for many years.

The entity would have negligible income for several years, but would have operating and capital expenses that would result in loses to be carried forward.

I would want to get professional legal assistance in the initial setup of the structure.

Once the venture is (hopefully) successful in several years I would look at outsourcing the accounting effort so the administrative expense would grow in line with the company.

I would appreciate feedback from any others with similar experiences.

 

[Rob G.]

Perfectly practicable if you study courses in accounting, tax and the law of equity and trusts.

Merely paying someone for a trust deed will not give any benefit if not administered correctly.

 

[Paul@PFI]

Trusts

Spidey

Rob's view may sound harsh but its a fair assessment. I have been involved in trust issues for a long time as a professional. And I'm always finding something new, some changed opinion etc. Examples of issues that have emerged just in last few years. Many accountants havent kept up :
- Trust resolutions. No resolutions ? Dated after 30 June? Or even a trust resolution has been written but it has fatal wording. What is income ??...The ATO can and will assess tax at the highest marginal tax rate.
- Your trust deed says "its in the trustee discretion"...So you think the trustee can decide something simple. Like allocating a capital gain to a specific taxpayer. The ATO might not agree. I would seek guidance on 'streaming" to avoid concerns.
- Distributions to adult children...What is your strategy to repay the undrawn entitlement ?
- Distributions to a "bucket company" to avoid high marginal tax rates on trust income and to allow income to be taxed at 30%. This old approach may expose you to some problems. Do you understand the issue?
- Re-write of Trust tax law is on the horizon.
- Stamp duty issues
- Deed stamping issues
- Bankruptcy and Family Law changes which may affect the asset protection of trusts (or may enhance them)

Then there are some issues like remuneration. A Discretionary trust might not actually employ the "managing director". Are they a employee or a beneficiary ? ie uninsured or insured ? Is there a Personal Services Income issue in any case ? So longer term there could be workers comp, super issues etc. I have seen this happen and the MD has made a claim on sickness policies and been declined. Because they were not "employed". Ditto longer term if there isnt a compulsory 9.25% super contribution could the working persons end up with lower retirement savings all because of a trust ?

And then there is the "alter ego" problem with a trustee....Just establishing a trust and a company doesnt make it work. Saving money by having human trustees is even worse. The old "DIY" trust problem that nobody can fix. Just had a client resolve a settlement with ATO... all could have been averted if they had used a trustee company rather than save a few hundred dollars.

I always advise clients:
1. Seek structure advice from a structuring specialist...terry_w as example
2. Then its handed over to the accountant
3. The client does the "DIY" accounting and works with the accountant who offers adhoc support.

Something I was once told by a tax barrister .... "Partnerships are best used for people who plan to go broke and who have no assets and plan to never have any. A sole trader is someone who is prepared to risk losing their home in the pursuit of always having a small business".

Is this a business that could use a service trust? a fixed trust or a discretionary trust ? Borrowings ?? Lots to consider.

 

[Terry_w]

There is an interesting article about failed trust distributions in the latest TTI magazine. There are a few cases where distributions have been paid for years to certain persons who, it later turns out, where never beneficiaries. Naturally this creates all sorts of tax and legal problems.

simple mistakes can be very costly to fix.

 

[spiderpig]

Thanks for the prompt responses -I was expecting a critical (harsh) audience so no offense taken.

My motivation for using a trust is primarily asset protection - rightly or wrongly all of our other private wealth to date have been invested in our own names. And thanks for the anecdote Paul@PFI, I am not advocating a sole trader or partnership structure as I do appreciate the limitations.

This trust would have very little in the way of deductions, income or distributions for around 20 years. So even if it was near dormant for this period after inception I would still need to pay yearly accounting fees? This has a significant (compounding) impact on the viability of the project.

 

[alexlee]

This trust would have very little in the way of deductions, income or distributions for around 20 years. So even if it was near dormant for this period after inception I would still need to pay yearly accounting fees? This has a significant (compounding) impact on the viability of the project.

And how significant would the impact of messing up the trust operations be?

You don't know how to operate a trust.

 

[Paul@PFI]

It never ceases to amaze how many of these same accountants then take a AAT case to the point of incriminating one self.

There is an interesting article about failed trust distributions in the latest TTI magazine. There are a few cases where distributions have been paid for years to certain persons who, it later turns out, where never beneficiaries. Naturally this creates all sorts of tax and legal problems.

simple mistakes can be very costly to fix.

 

[Paul@PFI]

Spider

Interesting anecdote based on a client....They too had a trust with no income and few expenses for many years. Trustees argued that expenses exceeded the trivial income. No need to lodge a tax return right ? And so for 15+ years the trust acted as a bank for their other entities. Money in and out. Then one day the ATO asked what the $40m deposits and $40m withdraws were after a single transaction through a lawyers office involved in a Wickenby matter. They said all the deposits were income if you cant prove otherwise. They applied a max penalty for recklessness cause trustees didnt prepare financials and have proof on every deposit and withdrawal. They they argue it was evasion. Onus is on them to prove it wasnt.

Assessment was $20m for a trust with no income and few expenses. The legal fees approached $1.5m. And human trustees were personally liable because of course no trust distributions had occurred.

I found them Sydney's best (! A big claim I know) hard as nails tax lawyer who sorted it in two weeks ! Settled with ATO for more than $1m though.