Buying shares - Trust vs Pty Ltd

Exactly ...

Why do you think such things as stapled securities exist in Australia ?

To cope with the unequal treatment of income and capital gains.

Trust holds capital appreciating assets and distributes income in the most tax-effective manner, while the company performs the active (and risky) management business.

Companies are very good at deferring income - kind of like a withholding tax at 30%. The net amount can be reinvested in the business. Any capital returns cop CGT and there is no 50% discount.

Discretionary trusts may also be able to split income to achieve low average tax rates and the beneficiaries can reinvest their present entitlements. With enough individuals the rate may be lower than 30%. They avoid CGT even E4 whilst benefitting from the 50% discount.

In both cases, small business CGT concessions *might* be available.

Cheers,

Rob

 

We're on the same track, but I think you're overcomplicating. In my scenario, there's only one company, not two. It's the "My Idea and Subsequent Investment Company Pty Ltd". I don't see there's any benefit in having the two companies with a dividend flow between them.

In your scenario, you're using two companies, a trust, and 8 human beings to achieve a similar outcome. Yes, yours is more flexible, but from where do I get the 8 human beings, and what if I need to scale up to $2m/yr ?

I agree that a company structure is not for everyone; certainly not for a beginner looking to invest their first few thousand.

But if you actually do the figures, you'll find a simple single company structure works very well for the accumulation of assets. It's not an unrealistic scenario because many people generate income other than through bequeathments and wages. Many people have business activities.

The only circumstance where a company is completely out of the question is where you're working for the man (even if that man is yourself), earning wages and paying personal tax. Then you definitely would not want to take your after tax savings and whack it in a personal investment company because the damage is already done.

I suppose it's also inadvisable if your business happens to be the local dry cleaner or milk bar, where someone might trip when they walk in the door and sue you, or where you might want to sell the business (maybe that's your two-company scenario). But if you are an author, programmer, composer or teleportation inventor, then it works well.

I really would encourage you to do the figures, as the winner really does depend on the assumptions of capital gain rate and retention.

BTW, thanks for this forum. I used to read the aus.invest newsgroup, but that is a wasteland these days. Google Groups aus_invest is okay, but not much goes on there. Chimes In Exile doesn't really do it, either. InvestEd is definitely the place to be. Let's hope you make your target.

 

What about a trading trust - another Aussie invention to overcome unequal tax treatments of companies for CGT ?

I still don't like the idea of assets being held by the same entity as the one that conducts the business !!!

Why not have a trust own the assets and license the right to use them to the company that runs the business ? Very good for intellectual property.

Cheers,

Rob

 

Well, the original poster invited people to 'discuss', so I guess he's getting his wish !

Interesting stuff, Sim & Rob. Let's say I've written a particularly nice poem, for which my company holds the copyright. And I let people recite the poem to each other, sending my company a small fee each time they do. What sort of cataclysmic events do you think I should be worried about ?

(A hypothetical example - I am not really a poetry billionaire).

 

Scenario #1.

Company owns copyright and proceeds to market/exploit the poem.

Company found guilty of breaches of various fair trading acts and fined heavily.

The intellectual property being assets of the company are at risk to satisfy court costs and fines.

Scenario #2

Intellectual property owned by a discretionary trust.

The trust licenses the use to a $2 company that markets/exploits the poem in an arm's length arrangement.

Any damages, fines, legal costs recoverable against the company are limited to the company's assets. The trust is a separate entity and not a party to the court proceedings.

Cheers,

Rob

 

Ok,

so you don't mix your shares with your property in 1 property?

 

Good point.

 

cant we rely on landlord insurance to cover us for any claims if any?

Mixing several propertys in 1 trust is kinda same as mixing property and shares in 1 trust, in terms of risk.

 

Sim,

if i mix 4 properties in 1 trust, why not mix some shares and property in 1 trust?

with too many trusts, the accountant goes to the bank smiling from ear to ear....

 

If i buy shares with my company, should i also claim the gst?

Since I dont get the 50% CGT discount, I may as well list my company as a trader?

I usually hold shares for less than 1 year...

 

well, i make at least 20 trades per month easily... and I have many broker accounts. With margin lending, I trade at least $20,000 of cfd per month.

I trade shares, CFD, FX, gold, silver.

Previously I did it under my own name, now I would like to do it thru my company.

Can i claim gst in my situation?

Do i qualify as trader?

 

Individuals tend to be treated as investors by the ATO, even when very active.

If you "trade" through a separate entity then you might be treated differently.

A trust can be a very active investor and yet the beneficiaries get any 50% discount on securities held more than 12 months.

There is no GST on shares, only brokerage which hopefully is a very small percentage.

If you are deemed a business, then beware Division 35 and non-commercial losses forcing you to defer loss deductions in some cases - needs planning & structuring.

Also if you are a company, beware of changes in ownership when there are carry-forward losses, loans to directors, use of property by employees, etc.......

In fact ... go see an advisor because there is just too much to consider from taxation, financial and estate planning, and asset protection viewpoints.

Cheers,

Rob

 

Thanks for interesting discussion... must say I find this all very confusing, even after reading several books and listening to expert presentations, it still seems to be difficult to know. Just to add more confustion... there are some high profile people who argue against the use of Trusts at all (I believe Margaret Lomas writes about this with respect to real estate) and others have devised special Property Trusts for real estate that seem to have advantages over 'normal' Trusts (though I don't know if they are legally tested) - too much to get head around sometimes

In summary, is Trust + CorporateTrustee the best general way to go - considering tax effectiveness, asset protection, cost, simplicity?

If had three basic inter-related investment strategies:
1. buy & hold real estate (growth + equity)
2. buy & hold shares (growth + dividend flow)
3. share trading (mainly cashflow)

Would the Trust-PtyLtd structure still be best?

Is it a key thing that the Trust must make an overall profit? (Inability to distribute losses & for FF dividends to apply.)

With respect to buy&hold shares and share trading - seems to me it's theoretically possible to 'split' the resulting capital gains and income over two names by operating half the activity in another person's name and having Authorised Authority to their accounts. (I think this achieves one of the goals of a Trust, of 'splitting' the tax - not as flexible as a Trust of course, but very simple and virtually no cost involved.)

Regards, Ilori