Summary and Questions on Trusts

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From: Andrew Scott


I have just finished reading Renton's book on Family Trusts. I'd appreciate if people could cast their eyes on this summary and let me know if I've gotten the gist of it.
<P>
Asset owned by investor
<UL><LI>Income from asset is taxed at investor’s marginal rate (up to 48.5% inc Medicare).</LI>
<LI>Income can be saved, and savings used to buy further assets.</LI>
<LI>Sale of asset has discounted capital gains tax if held for long enough [why sell?]</LI>
<LI>If asset is property, may push investor over land-tax limits.</LI>
<LI>If returns are to be passed to others, double-taxation will result.</LI></UL>
<P>
Asset owned by a discretionary trust, investor is trustee and beneficiary
<UL><LI>Income from asset is untaxed.</LI>
<LI>All income must be distributed, otherwise penal tax of 48.5% applies.</LI>
<LI>Sale of asset has discounted capital gains tax if held for long enough [why sell?]</LI>
<LI>Property assets do not count towards investor’s land tax limits.</LI>
<LI>Returns can be passed to anyone without additional taxation.</LI>
<LI>Depreciation can be passed to anyone.</LI>
<LI>If investor is sued, asset is protected.</LI>
<LI>Trust legislation seems to be in flux.</LI></UL>
<P>
Asset owned by a company, company owned by investor.
<UL><LI>Income from asset is taxed at flat company rate (30%).</LI>
<LI>Income can be saved, and savings used to buy further assets.</LI>
<LI>Complication accounting practices required, eg. franking account.</LI>
<LI>Additional expenses required to run a company.</LI>
<LI>Returns can be passed to anyone (via dividends) without additional taxation.</LI>
<LI>Depreciation cannot be passed on, but must be used by the company.</LI>
<LI>Investor could be an employee of the company, and receive added benefits, eg. tax-free health.</LI>
<LI>Having employees results in further costs and complication for the company.</LI>
<LI>Sales of assets do not receive discounted capital gains tax.</LI>
<LI>If investor is sued, asset is only partially protected, ie. shares in the company aren’t protected.</LI>
<LI>Property assets do not count towards investor’s land tax limits.</LI>
<LI>Property assets count towards company’s land tax limits.</LI>
<LI>Company can persist indefinitely, unlike investor or trust.</LI></UL>
<P>
Asset owned by a discretionary trust, company owned by investor is trustee and beneficiary
<UL><LI>Income from asset can be saved, and is taxed only at flat company rate (30%).</LI>
<LI>Returns can be passed to anyone, without additional taxation.</LI>
<LI>Investor could be an employee of the company, and receive added benefits, eg. tax-free health.</LI>
<LI>Additional expenses and complication.</LI>
<LI>Further property can be placed in a new discretionary trust, avoiding land tax limits.</LI>
<LI>Sale of asset has discounted capital gains tax if held for long enough [why sell?]</LI>
<LI>Asset is only partially protected if investor is sued</LI></UL>
<P>
Asset owned by a company, company owned by a discretionary trust, investor is trustee and beneficiary
<UL><LI>As above, but...</LI>
<LI>Property assets do not count towards investor’s land tax limits.</LI>
<LI>Property assets count towards company’s land tax limits.</LI>
<LI>Asset is protected if investor is sued.</LI></UL>
<P>
Asset owned by trust, company owned by other trust is trustee is beneficiary, other trust is managed by investor
<UL><LI>As above, and...</LI>
<LI>Property assets do not count towards company’s land tax limits.</LI></UL>
<P>
So yeah.. some questions. If asset protection is required, must you have a trust that is as “close” to the investor as possible, eg. investor is trustee of said trust? If land tax minimisation is required, can put asset in either company or trust, but trust will be cheaper in general?
If wish to build up savings for later purchases, a company should be between the asset and the investor to collect the income stream at lower tax rate?

Thanks for any help/advice.

Andrew Scott
 
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Reply: 1
From: Donna Larcos


I have discretionary family trust which
owns one of my IPs but as I understand it
Trusts are not eligible for land tax limits
so you pay land tax from dollar one.
 
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Reply: 2
From: Duncan M


>Asset owned by a discretionary
>trust, investor is trustee and
>beneficiary
>Depreciation can be passed to
>anyone.

Andrew, could you expand on this point for me? I've not heard of depreciation that occurs on an assett held within a trust being 'passed' to another entity/individual.

Thanks,

Duncan.
 
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Reply: 1.1
From: Andrew Scott


Donna,

Is this the situation in all states? My reading of the situation on www.sro.vic.gov.au seems to differ.

Firstly, it appears that both trusts and corporations are free of land tax if the property's total unimproved value is less than $85,000.

Secondly, a trust owning property that has as its beneficiary a person who uses that property as their primary place of residence will be free of land tax. (ie. same deal as if that person had owned the property directly).

Thirdly, different corporations may be grouped together for land tax evaluation purposes (eg. if the same person has a controlling interest in each of the corporations), avoiding the ability to use corporations to minimise land tax in the same way as trusts.

But please check it yourself. I may have misinterpreted this.

Andrew Scott
 
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Reply: 2.1
From: Andrew Scott


Duncan,

I don't think I put it very well. Based on p147 and pp227-8 in the 2nd ed. of Family Trusts..

It seems that with a trust, depreciation can be offset against income, allowing a "tax free" distribution of that income.

Whereas, with a company, depreciation doesn't produce franking credits. So, when the income is distributed as dividends, it is distributed unfranked. Hence, this income is later taxed at the recipient's marginal rate.

Does this sound right?

Andrew Scott
 
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