Services Business using a unit trust?

[woohoo]

Hi guys
I was approached by a company to set up my own architecture company.
They will be giving me a lot of big projects to do.

I have a unit trust that has some tax credits in it, being left over from an old land I sold off a few years back. The only way to make use of the credits is to do some business with this same abn.

This unit trust is fully owned by a trustee company, and I'm the director. I used to have a business partner who owned 50% of the unit trust but he has since released his units back to me.

1)Is this a good structure to use?
2)trying to get professional indemnity insurance in the unit trust abn, or should it be "trustee for xyz unit trust "?
3)is it ok for my trustee of my other hydrid trust which owns a rental property own part of the units? Although I do not see any accounting benefits by doing that, just a thought .

Any thoughts, etc, please fell free to discuss

 

[Rob G.]

1) Unit trust does not protect very much the underlying assets from your personal creditors.

The acquisition of 50% of the units from your associate will likely prevent you from using the past trust losses.

If the income is primarily from your personal exertion and most of your business is with the one client then PSI rules will treat you effectively as an employee with all income being yours and limited deductions.

3) If subject to PSI rules it doesn't matter who owns the units, the income is taxed to you.

If the units are held on a discretionary basis by the other trust there may be some asset protection against your personal creditors.


Background facts: Why does the 'client' insist on you having a company ? Do they insist that it is you personally that provides the services ? Do you act under their direction ?

There is a lot of dubious sham contracting in the building industry and you need to be aware of the PSI regime.

Cheers,

Rob

 

[woohoo]

Hi Rob,

Would it be better to just use a pty ltd than a unit trust?

Do u mean its much better to set up a discretionary trust for this venture?

I didnt know Unit Trust has different asset protection than Discretionary Trust..

 

[Terryw]

I didnt know Unit Trust has different asset protection than Discretionary Trust..

Units in a unit trust are property so if this property is held by a person who goes bankrupt then they can fall into the hands of that person's trustee in bankruptcy.

With a discretionary trust no one beneficiary has an interest or property in the trust. There is no guarantee that any one will receive income from the trust as it is in the discretion of the trustee. The only right a beneficiary has is to be considered when the trustee makes a resolution to distribute income. So if one beneficiary were to go bankrupt the trustee would consider making a distribution to that person and is likely to decide not to give them anything. If they did make a distribution to a bankrupt then the trustee in bankruptcy is likely to get their hands on that money and give it to creditors (after taking out huge fees of course).

 

[woohoo]

I see, i think thats why many accountants recommend Discretionary Trusts(Family Trusts) to do this type of business.

BUt the thing is, I have no beneficiaries to distribute income to, to lower tax rate. Most of my relatives are overseas, meaning if i distribute to them i will have to pay withholding tax.(10%?)

unless i distribute to a company,.

 

[Terryw]

I see, i think thats why many accountants recommend Discretionary Trusts(Family Trusts) to do this type of business.

BUt the thing is, I have no beneficiaries to distribute income to, to lower tax rate. Most of my relatives are overseas, meaning if i distribute to them i will have to pay withholding tax.(10%?)

unless i distribute to a company,.

I am sure that if you went bankrupt your trustee would find someone amongst your trust's beneficiaries to distribute to.

 

[woohoo]

i wasnt thinking of bankrupcy i was thinking more of tax management on how to reduce tax rate....

 

[Terryw]

You may get some more beneficiaries over the years - such as a spouse, kids, grandkids etc.

In the meantime if it is only you then you may not have too much scope to save tax, other than distributing to a company. But at least you will have the option in the future as circumstances chance and also will have asset protection as well.

 

[woohoo]

Yup agree, so u think I should still leave my unit trust aside and not touch the tax credits? I feel it's quite a pity.

How about if I use the unit trust and have a new discretionary trust own the units, and once the tax credits used up I can change the abn of the architectural business to the discretionary trust? Good? No good?

 

[Terryw]

Yup agree, so u think I should still leave my unit trust aside and not touch the tax credits? I feel it's quite a pity.

How about if I use the unit trust and have a new discretionary trust own the units, and once the tax credits used up I can change the abn of the architectural business to the discretionary trust? Good? No good?

You should get some advice on the tax issues with the trusts.

 

[RPI]

If you are doing this to reduce tax you may trigger a IVA general tax avoidance issue and the ATO would have issues with you. However there are many other reasons for establishing this type of entity such as efficient business structures etc. I would avoid having anything written (including posts on an internet forum) regarding your intentions to use a structure to reduce tax, lest it be used against you in the future.