Trust Types/advantages

[Plan_Trader]

Coasty,
Times do change, but I think I know that more than you if you think this is not an issue.

Say you have investments or a business in trust. You make substantial profits. You don't actually need or want the money distributed to individuals, so must distribute to corporate beneficiary. Before, you could leave all of your investments/business assets to grow in the trust and just have an unpaid present entitlement. Now, unless you liquidate investments and shift funds to the company, you must create an official documented loan back to the Trust which must be repaid over 7 years. You end up having another set of investments/assets in the company name. Repeat this over and over each year and see what happens.

" if the ATO's view is continued, then the use of trusts will be more restrictive. The ATO seems to think it is wrong to distribute to a company " David Pring, Deloitte Private Tax partner.

In your words, keep up to date. You may have the wrong accountant if you think it your responsibility to "make sure your accountant" is up to date.

 

[Terry_w]

Coasty,
Times do change, but I think I know that more than you if you think this is not an issue.

Say you have investments or a business in trust. You make substantial profits. You don't actually need or want the money distributed to individuals, so must distribute to corporate beneficiary. Before, you could leave all of your investments/business assets to grow in the trust and just have an unpaid present entitlement. Now, unless you liquidate investments and shift funds to the company, you must create an official documented loan back to the Trust which must be repaid over 7 years. You end up having another set of investments/assets in the company name. Repeat this over and over each year and see what happens.

" if the ATO's view is continued, then the use of trusts will be more restrictive. The ATO seems to think it is wrong to distribute to a company " David Pring, Deloitte Private Tax partner.

In your words, keep up to date. You may have the wrong accountant if you think it your responsibility to "make sure your accountant" is up to date.

It was and still is not wise to have unpaid present entitlements. What happens if the individual dies or goes bankrupt.

I have a client now who is director of the family trustee company which is being sued by the executor of the later mum's estate over the return of years and years of unpaid present entitlements. These are loans owed to the individual and must be called in for the estate to be wound up. Trust has no liquid funds to pay. Executor is duty bound to sue even though beneficiaries of the will and the trust are largely the same.

 

[RPI]

Plan

Can you explain further the "you are making substantial profits but then need to liquidate investments to distribute the profits" part of above?

 

[coastymike]

Why do you have to keep the cash in the trust and not distribute to the corporate beneficiary ?

Have you considered putting the loan on sub-trust. Even if not on sub trust does Division 7a mean you will actually be better off having a complying Division 7a loan agreement in place and repaying the corporate beneficiary in accordance with Division 7a. Have you run through those numbers ?

Quite up to date . Masters of Tax completed 2010. Certificate in Applied Tax 2013. Chartered Tax Adviser. Prudential Auditor on Serious Non Compliance Issues having worked on quite a few Wickenby matters. This unpaid present entitlement issue came up quite a lot. Main issue was no planning had been done for it.

I'm not saying it isn't complex i'm just saying it isn't an issue. The two things are very different. If you want it simple and not an issue then I agree this can't be achieved anymore. I never said that was the case.

 

[RPI]

It was and still is not wise to have unpaid present entitlements. What happens if the individual dies or goes bankrupt.

I have a client now who is director of the family trustee company which is being sued by the executor of the later mum's estate over the return of years and years of unpaid present entitlements. These are loans owed to the individual and must be called in for the estate to be wound up. Trust has no liquid funds to pay. Executor is duty bound to sue even though beneficiaries of the will and the trust are largely the same.

Asset protection back the other way is so often overlooked. I find this most with companies. Build up a successful business in company structure but hold the shares in your own name. If something goes wrong outside of the company structure and you have personal liabilites, shares are an asset and you can lose the company. For the small extra annual cost of holding the shares in a discretionary trust, seems like cheap insurance to me.

 

[coastymike]

Amen to that RPI

 

[Terry_w]

Death is another aspect of asset protection that is not property considered.

Imagine you have set up your structures and have a really tight asset protection plan in place with multiple business companies which you are a director of with large potential exposure if things go wrong and then your parents die leaving you a fortune... Discretionary testamentary trusts need to be considered.

Or,

You die with no back up appointor in your trust deed. The legal personal representative may end up with the role - You appointed your brother to act as executor, but he has renounced the position as he is worried about liability for mistakes. Another family member, who you never liked, applies to the Supreme Court and is appointed the executor of the estate and thereby he controls the appointor position of the trust. He immediately sacks the trustee company which is controlled by the brother and he appoints his own company as trustee and begins distributing the trust assets to his own family.

 

[RPI]

Just a bit of a left field thought

What about having a limited liability partnership instead of a bucket company?

Incorporated llp pays tax at corporate rate but escapes the div 7A issues.?

 

[coastymike]

To go through an example as to how this might not be an issue.

Trust A development company (revenue account) makes profits and distributes to corporate beneficiary. Corporate Beneficiary paid.

If corporate beneficiary lends funds back to trust A (even though present entitlement has been paid) Division 7a applies.

However if corporate beneficiary lends funds to Company B (a new development company - revenue account so dont need general 50% discount) then company to company means Division 7a doesnt apply. Funds then used to support business growth and development.

So same goal achieved but instead of one trust and a corporate beneficiary you have Trust A, corporate beneficiary A, Company B, Trust holding company shares in Company B. Like I said a bit of tax planning is all that is required to achieve a similar result.

 

[coastymike]

RPI

See http://www.ato.gov.au/smsf/content.aspx?menuid=44743&doc=/content/00249046.htm&page=4&H4

Division 7a applies to limited liability partnerships.

 

[RPI]

Hi Mike

Cheers, just about to come back and say that Div 7A does now apply to closely held corporate limited partnerships.

LLP's are something I do not have experience with. I am researching them as an option for my Journal article on innovative business structures in Legal and multidisciplinary practices, but have never sued anyone with one, nor had one myself.

Mike if you can think of any out there structures for the above, please feel free to chip in.

Darryl

 

[coastymike]

Daryl

Yes entities I can think of worth discussing include

1. Sole traders
2. Partnerships
3. Discretionary Trusts
4. Hybrid Discretionary Trusts
5. Partnership of Discretionary Trusts with Corporate Agent
6. Unit Trusts
7. Companies
8. Limited Liability Partnerships (LLPs)
9. Joint Ventures
10. Offshore Structuring (a whole gamut of issues here)

Anyway just off the top of my head but a pretty good start.

 

[Terry_w]

Daryl

Yes entities I can think of worth discussing include

1. Sole traders
2. Partnerships
3. Discretionary Trusts
4. Hybrid Discretionary Trusts
5. Partnership of Discretionary Trusts with Corporate Agent
6. Unit Trusts
7. Companies
8. Limited Liability Partnerships (LLPs)
9. Joint Ventures
10. Offshore Structuring (a whole gamut of issues here)

Anyway just off the top of my head but a pretty good start.

And

11. SMSF (with restrictions)

 

[RPI]

In NSW a partnership of trusts all with their own corporate trustees is not a problem from a legal profession perspective. In QLD it is because the current interpretation of models seems to allow for structures that involve 1 incorporated legal practice, not multiple.

However, there is not an issue from a practicing certificate perspective, with having a discretionary trust with corporate trustee, as a subcontractor to the legal practice. The individual practitioner may come into a problem with the PSI rules though. Although, it also looks like this could be avoided by have a co-representation agreement between the legal practice and the discretionary trust. This would require the discretionary trust to have a legal practice director and be registered as an incorporated legal practice. Other professions have managed to get a private tax ruling on such a model, I have not seen one for lawyers though.

 

[RPI]

What about the use of Limited Liability Partnerships where all limited partners are discretionary trusts with corporate trustees and the general partner is a straight company?

In Queensland this would not be allowed as a legal practice. The legal profession Act does not contemplate the use of a corporation in any partnership, apart from a multidisciplinary practice.

 

[coastymike]

And my understanding is barristers must practice as a sole trader

 

[RPI]

And my understanding is barristers must practice as a sole trader

Yes, you're absolutely correct, they are called a barrister sole. Barrister's chambers are akin to specialised service offices in this regard.

Though some jurisdictions are technically merged, eg in NSW your practising certificate refers to you as a solicitor and barrister, the bar associations typically require you to work as a barrister sole. This sucks both for asset protection and business structuring and taxation purposes.

Barrister's have advocates immunity, that is they are not able to be sued for their court work, but they can still be sued because of an advice they have given which is not related to advocacy.

But do have to pay income in their own name. I know a barrister who pays over $200k a year in income tax, despite some tax planning. It's a problem I would like to have, but if they were allowed to run through companies or trusts, would be better.

 

[coastymike]

Which provides for good structuring opportunities as well I guess.

1. Purchase the chambers through an smsf and lease at a commercial rate to the barrister.
2. Employ admin staff and ancillary staff through a trust structure and provided the markups comply with phillips v fct then some opportunity for profit streaming.

This has been a good discussion thread on these issues.

 

[Terry_w]

Which provides for good structuring opportunities as well I guess.

1. Purchase the chambers through an smsf and lease at a commercial rate to the barrister.
2. Employ admin staff and ancillary staff through a trust structure and provided the markups comply with phillips v fct then some opportunity for profit streaming.

This has been a good discussion thread on these issues.

Professional library (and wig and gown) owned by another trust controlled by the wife. Poor barrister must rent books from the trust when he needs them.