SHould I use PTY LTD or FAMILY TRUST for business when I have nobody to distribute to

[woohoo]

Hi all,

Im setting up my own architecture business soon.

I was thinking of setting up a Discretionary Trust for this, but as I try to think about who I could distribute profit to, there's nobody I can...
1. I have one sister earning about $40,000 a year. I guess that means she's already near 30% tax bracket.
2. I have another sister who is a single mother working part time and partly on social security for her child, so I don't think I could distribute to her.
3. All my other relatives are overseas... (Witholding tax if I distribute to them?).
4. I do think about if I get married one day and have kids in future, thenn the trust may come in useful.

Because of this, I am now considering using a PTY LTD instead. More straightforward?
1. CHeaper accountant fees each year?
2. No set up cost for trust
3. My sister helps me with admin, filing, bookeeping, so I could pay her via my company to reduce profit.

What do you think? Any comments or points to consider?

 

[alexlee]

If it's excess profits (i.e. money you don't need to live on) then one option is to set it up in a trust, then distribute to a company. The company pays a max of 30% tax and keeps the tax credits for the future. So in the future the company can pay fully franked dividends to its owner, which, if it's another family trust, can then distribute fully franked dividends to beneficiaries. You might have more family / kids in the future, etc.

Depends on your personal circumstances and most of all how much money we're talking about to see if this is worth it, but this is one option. The other thing to consider is asset protection. I'm not sure whether setting up the business in another entity protects you personally? Moving the profits to another entity, especially one under a separate family trust, would provide greater asset protection.

Usual provisos about this is just general comments not advice, seek advice from your accountant, etc.

 

[Peter_Tersteeg]

Personally I prefer to use a Pty Ltd structure over a trust.

* A trust must distribute all profits in a given year. A company has the ability to retain profits internally. If your business makes $200k profit, you may choose to pay yourself a directors salary of $75k to keep yourself within the 30% tax bracket, and hold the rest within the company, also at 30% tax. If you've got to distribute these profits, you'll end up paying up to 45% tax on some of that money.

* A Pty Ltd structure is a bit more flexible with ownership. You can add and remove directors, buy and sell share. This makes it easier for parties outside of the business to enter into an ownership arrangement if you desire. It's difficult to do this with a discresionary trust (a unit trust is another matter).

A big advantage of a trust structure is I believe it's more tax advantaged when you sell and incur capital gains.

As Alex suggested, a trust with corporate trustee can be an advantage, but it also creates the problem of the trustee company actually being worth something.

Another thing to consider is what are the impilcations of having a trust be the shareholder of a company through which you operate. This can be another way of distributing profits creatively, and can work well if the trust holds negative geared property as well.

This is all stuff you need to have a detailed discussion with your accountant about, but it's good to discuss here to get ideas to throw at the accountant.

 

[alexlee]

As Alex suggested, a trust with corporate trustee can be an advantage, but it also creates the problem of the trustee company actually being worth something.

I was more thinking the trust OWNS a company (different from the trustee company). As you said, you don't want the trustee company to actually have assets.

Whether it's worth it to get that complex depends on how much money will be going through this structure.

 

[Terryw]

The question should be whether to set up as a company in its own right or a company as trustee.

You should never run a business under a personal name. This includes setting up a trust with yourself as trustee.

A company offers limited liability. Running a business is extremely risky and you are likely to get sued one day. With a company, generally, the liability is limited to the company and its assets. The shareholders are safe, and the directors are, generally, safe (unless insolvent trading, unpaid tax, crimes etc).

If you run a business through a trust with yourself or an individual as trustee then the individual's personal assets would be at risk.

You also do not want to own the shares in the company in your own name for asset protection and tax reasons. So there should be 2 structures to consider, broadly:

1. Pty Ltd company operating as a trustee, or

2. Company operating in its own right with the shares owned by a trust.

Since a company doesn't get the 50% CGT reduction option 1 may be better.

 

[Mry]

As with most questions, too many factors to consider.

For the most part, trusts distributing to companies and then giving the cash to beneficiaries is dead. If you distribute, you have to follow up with all the cash you said you'd give the company. Unless you have something to actually do with the cash in the company.....
http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR20103/NAT/ATO/00001

Personal services income needs to be looked at. I hate having to review this part all the time.

I always prefer the use of negatively geared investments to reduce tax rather than looking at distributing outside the family unit.

As others said, see your accountant.

 

[woohoo]

Hi when you guys say CGT, do you mean if I sell off the company in the future, I can be hit with CGT?

While in a trust I get 50% off CGT?

I dont think i will be buying any value growing assets under my company name.

 

[Terryw]

If a company made a capital gain it would be taxed at the flat rate of company tax, 29%(now ?).

If an individual or a trust made a capital gain they could get the 50% CG discount (if held for more than 12months) making the top tax payable about 22.5% and medicare levy.

 

[Mry]

Company tax rate is 30%. The worst tax rate on discountable capital gains for assets sold outside the trust is 23.25% (45% + 1.5% / 2).

If you do plan on buying a company to trade through, buy the shares in the name of the trust so you can distribute dividends or the proceeds from the sale of the shares to others if possible, and to ensure that if you are sued or go bankrupt that the shares cannot be taken from you.

Best to talk to your accountant about how to sell the company/business in the future. There are small business CGT concessions you can take advantage of which may be better than selling the company shares.

The 50% capital gains discount for owning assets for more than 12 months is not available for assets sold within the company. The shares are not considered to be held by the company itself, only the shareholder. The shareholder could be a trust, individual or another company.

 

[Ocean Architect]

I'm facing the same issue presently, and am leaning towards the trust pathway based almost entirely on asset protection.

Curious to hear what you come up with vs what my accountant is up to

 

[woohoo]

do you guys mean i can set up a company, and then use my existing Hybrid Trust to hold shares in the trading company? THen appoint me as director.

If set up this way, will the assets in my Hybrid Trust be safe?

 

[Terryw]

do you guys mean i can set up a company, and then use my existing Hybrid Trust to hold shares in the trading company? THen appoint me as director.

If set up this way, will the assets in my Hybrid Trust be safe?

That is one way.

Shareholders cannot be held liable for company debts (unless they have given guarantees etc).

What you should also be concern about is if your shares are safe. Is there a risk the hybrid trust could get sued?

Also because of the complexities with a hybrid redeeming units and valuations of assets etc it may be better to use a pure discretionary trust to hold your shares.

Seek tax advise as there are issues to consider with trusts receiving dividends.