Family Trust

Hi All - first time poster, long time forum visitor!

We have a family trust with a corporate trustee (wife and I are directors of trustee company). My wife has returned to the workforce now that the kids have grown up and we will therefore both be earning above the 37%+2% ML marginal tax rate. The benefit of distributing all the trust income to my wife no longer exists, so we are looking at our options around incorporating a company to receive investment income from the trust. We don't need the cash from the trust at this point so we will make the distribution in cash from the trust to the company and keep it there in investments/cash. No Div 7a issues this way I believe. The trust assets solely comprise of Australian shares and property.

This is how I envisage it will work

- New company (Newco) created with trustee as sole shareholder (in capacity as trustee of family trust)
- Trust distributes to wife and I up to say 37% marginal tax rate, any excess goes to Newco with accompanying franking credits
- Newco pays 30% tax on income from trust, investment income and capital gains (also benefiting from franking credit distributions, but no CGT discount)
- Funds remain in Newco until such time wife and I either need access to funds or our income drops below 37% marginal tax rate. At such time, Newco issues franked dividend which goes to trust, and then trust distributes to my wife and I as beneficiaries. The only tax should be the delta between the company tax rate and our personal marginal tax rate considering the franking credits.

Does this structure work ok?

If Newco is owned by the trust, is the trust deemed to have distributed all its income if it distributes to Newco? Or will the trust pay tax at the 47% rate as it is deemed to not have distributed all its income?

Any other issues I should be aware of?

Thanks for all your help.
 
You will have investments in the company ? All you are doing is splitting matters between the trust and the company. Self-defeating really. Why ?

A trust doesn't need to make a physical distribution. The distribution can be made on loan account and therefore be retained in the trust.

You need personal tax advice and thereafter ongoing guidance.
 
Hi Paul - thanks for the quick response.

Yes, it would be split between the trust and the company - essentially to leverage the lower tax rate of the company vs our personal tax rate.

If no physical distribution is made, doesn't that cause Div 7A issues?

Yes, I will be getting tax advice on this - but just wanted to get my head around these things first to make the conversation more productive with the accountant.
 
I think actual distributions are the better way to go. I had a client's mother die with about $150k on 'loan' to the trust from distributions not paid. It turned very mess with the trustee denying the loans, the executor of the estate suing the trustee (controlled by son) so he could distribute the estate as per the will (son a beneficiary!).

Distribute it and then gift it or loan it back with physical movement of funds.
 
Each year you distribute excess amounts to the bucket coy Newco you are potentially creating Div 7A loan, this needs to addressed each year and thus additional acc fees, tax to consider etc.
Times ago this is what people did, smash distributions to the "bucket" company.
Now the ATO what their top up tax!

We still utilise a similar strategy for business clients when:

1. High profits for a few years in the business
2. Losses in other trusts or entities soaked up via distributions from business entity.
3. Individuals distributed to - $180K (used to be 80K each)
4. Then the balance we sometimes send on paper to the bucket company
5. In later years we will time dividend payment to coincide with lower business profit years.

I would think a significant amount of Accountants do not handle Division 7A and Unpaid Present Entitlements correctly and the tax consequences of getting it wrong can be harsh.
Every time I get a sniff of these scenarios I say to people to address the accountant and ensure they understand what they are doing



You would want the trust to be the shareholder of Newco.


Hi All - first time poster, long time forum visitor!

We have a family trust with a corporate trustee (wife and I are directors of trustee company). My wife has returned to the workforce now that the kids have grown up and we will therefore both be earning above the 37%+2% ML marginal tax rate. The benefit of distributing all the trust income to my wife no longer exists, so we are looking at our options around incorporating a company to receive investment income from the trust. We don't need the cash from the trust at this point so we will make the distribution in cash from the trust to the company and keep it there in investments/cash. No Div 7a issues this way I believe. The trust assets solely comprise of Australian shares and property.

This is how I envisage it will work

- New company (Newco) created with trustee as sole shareholder (in capacity as trustee of family trust)
- Trust distributes to wife and I up to say 37% marginal tax rate, any excess goes to Newco with accompanying franking credits
- Newco pays 30% tax on income from trust, investment income and capital gains (also benefiting from franking credit distributions, but no CGT discount)
- Funds remain in Newco until such time wife and I either need access to funds or our income drops below 37% marginal tax rate. At such time, Newco issues franked dividend which goes to trust, and then trust distributes to my wife and I as beneficiaries. The only tax should be the delta between the company tax rate and our personal marginal tax rate considering the franking credits.

Does this structure work ok?

If Newco is owned by the trust, is the trust deemed to have distributed all its income if it distributes to Newco? Or will the trust pay tax at the 47% rate as it is deemed to not have distributed all its income?

Any other issues I should be aware of?

Thanks for all your help.
 
I'm with Greyghost on this. You end up with a company and a trust and high fees and a potential bomb if anyone borrows any of the $ physically distributed income. UPEs and loan documents and repayts become a mess. Taxed at a high marginal tax rate too since one day it has to come out of the company. The 30% company rate is closer to 58%

Too many fail to structure the company like Grey suggests...Trust owns shares in Co instead. The timing of div (FF ?) income down to the trust can be controlled and deferred. Then split. If no related borrowings are planned its usually ideal.
 
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