Trust owns all shares of a company, also the company is a beneficiary of the Trust?

[Poweregg]

Hi All,

As the title, I don't know whether it's legal and possible for:
A family trust owns all shares of a company, also the company is a beneficiary of the trust

As a family trust, you need to distribute all taxable income to beneficiaries otherwise the trust will be taxed on the top tax rate.

If the beneficiary is me only, when the taxable income is over $37,000, I need to pay 34%(32.5%+1.5% medicare) income tax...

To avoid paying too much tax, most accountant will suggest you put a company as beneficiary, so I registered a company A as beneficiary as company pay 30% tax.

To get the money out from I company, the only way is dividend(any other method rather director fee?), however, only shareholders can receive the dividend, if you family members are not shareholder, you can not give them dividend...of course you can transfer some share to them but maybe trigger stamp duty(nsw) and CGT

I am thinking to let the family trust owns all shares of company A.
Once the dividend was paid to the family trust, you can distribute the dividend(with franking credit) to any of your family members...

Is this structure legal? or any advices regarding this structure?
All comments welcome, thank you

 

[Terry_w]

I don't know of any trust law reason why it couldn't be done like that, but it is a circular thing. If the trust makes $100 and distributes it to the company as a beneficiary then the trust will make $100. The trustee will be taxed at 46% unless this $100 is distributed to a beneficiary.....

If the $100 is distributed to the company which retains it then it will pay 30% tax on it as income and be left with $70. This could then be distributed to the trust the next income year and so on.

Or this money could be kept in the company and lent to the trust. Watching out for Dvi 7A loan issues.

 

[Poweregg]

I don't know of any trust law reason why it couldn't be done like that, but it is a circular thing. If the trust makes $100 and distributes it to the company as a beneficiary then the trust will make $100. The trustee will be taxed at 46% unless this $100 is distributed to a beneficiary.....

If the $100 is distributed to the company which retains it then it will pay 30% tax on it as income and be left with $70. This could then be distributed to the trust the next income year and so on.

Or this money could be kept in the company and lent to the trust. Watching out for Dvi 7A loan issues.

Thanks Terry, the blue part is what I want.
As natural beneficiary maybe have high income sometime, use a company as "Buffer" to hold the money and pay the 30% tax（this part is claimable...so attractive）...
Then when next year, or after couple years, the natural beneficiary have low income, the money in company can flow into trust, then distribute to the natural beneficiary....
Picture attached

 

[Aaron_C]

The whole punitive taxation of undistributed trust profits thing is a reason why some people say it is better to operate a business with a company structure on top, with a family trust as a shareholder, rather than the other way around.

 

[MIW]

Poweregg,

That's part of the structure I use. However, I must say I am not sure I like it as sometimes the sole distribution of franking credits isn't favorably looked upon the financiers if you wished to borrow or refinance.
I wonder, how does the ATO view that, if you continue to distribute sole franking credits, say 3 years in a row, or until you deplete it to zero....?
I also think it needs to be a physical entry now as opposed to paper entry only, am I correct there?

 

[Poweregg]

The whole punitive taxation of undistributed trust profits thing is a reason why some people say it is better to operate a business with a company structure on top, with a family trust as a shareholder, rather than the other way around.

Total agree, sadly my accountant suggested the "Traditional Structure - Trust with a beneficiary company" to me.

If there is no DIV 7A and UPE issue, you can "distribute" money the company, pay the 30% tax, and Trust still use/control the money...
Now once the distribution done, the money distributed to company can NOT be touched by trust...unless you have a loan agreement...

 

[Poweregg]

Poweregg,

That's part of the structure I use. However, I must say I am not sure I like it as sometimes the sole distribution of franking credits isn't favorably looked upon the financiers if you wished to borrow or refinance.
I wonder, how does the ATO view that, if you continue to distribute sole franking credits, say 3 years in a row, or until you deplete it to zero....?
I also think it needs to be a physical entry now as opposed to paper entry only, am I correct there?

Hi MIW

Did you accountant give you some advices regarding this issue?
I talked my accountant today, he is not very sure this structure...but he mentioned ATO maybe attack you "Money from trust to company, then company to trust....which means money stay in the trust and you need to pay 46.5% tax..."

 

[Terry_w]

Total agree, sadly my accountant suggested the "Traditional Structure - Trust with a beneficiary company" to me.

If there is no DIV 7A and UPE issue, you can "distribute" money the company, pay the 30% tax, and Trust still use/control the money...
Now once the distribution done, the money distributed to company can NOT be touched by trust...unless you have a loan agreement...

Once the trustee of a discretionary trust makes a resolution to distribute money to a beneficiary then this is an unpaid present entitlement (UPE). ie even before the distribution is done.

Many people build up large UPE by leaving the money in the trust. This is very dangerous for many reasons:
1. You are still owed the money, ie it is yours.
a. what happens if you die and don't take care of this beforehand or in your will? Your estate must bring legal action against the trustee to recover the money. This happened to a client of mine where mum had a UPE of $100,000 owing. The trust had no money to pay this, ie no cash. the executor was duty bound to serve a statement of claim on the trustee even though the trustee's director was one of the beneficiaries of the estate and would have gotten part of the money back anyway.

b. General asset protection. You have a large UPE with 'your' trust. You go bankrupt and the trustee in bankruptcy goes after your trust to get the money back for creditors.

2. If the beneficiary is a company then there would be Div 7A issues as there is a loan from the company to the trust. Need a loan agreement and charge market interest rates.

Best way forward? Maybe distirbute the money to an individual and gift it back to the trust to use.

If the beneficiary is a company can the company gift to the trust? Probably not as there would be fiduciary duties of the directors behind the company - why are they doing an undervalue or no value transaction to benefit a trust which they will in turn benefit from. It could be possible with proper disclosure to all shareholders before hand. There may also be a few tax issues...

 

[Trogdor]

Wouldnt this strategy have legs if:

- all surplus income is physically distributed to a company (CPY X)
- CPY X is "owned" by a separate discretionary trust
- This income is taxed at 30% at CPY X level
- Balance (70%) is reinvested (e.g. in shares) help by CPY X

Over time this extra money will be taxed at 30% on the way in (not 46%) and will compound at 30% (not 46%).

When the cash is needed CPY X can dividend it up, and the discretionary trust can then distribute it as necessary.

 

[yahoo]

Unfortunately if you already have a trust which must distribute to a company or individual beneficiaries and the company must be paid the distribution or face div 7A when you dont have the cash to pay the distributions, which will never happen because of loan repayments, then the only option is increasing the individuals UPE