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Can I transfer capital from a company to a trust?

Discussion in 'Accounting, Tax & Legal' started by Syd Bogle, 9th Apr, 2017.

  1. Syd Bogle

    Syd Bogle New Member

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    I operate my business through a company, which is 100% owned by my family trust. The company will pay out some of its profits as a fully franked dividend to the trust, which in turn will make distributions to beneficiaries (my family members and me). A portion of the company's profits will be retained by the company.

    I wish to use these retained profits to invest in shares, but the disadvantage of purchasing shares within the company is that I would not benefit from the 50% CGT discount available to trusts and individuals.

    Is it possible for the company to transfer its retained profits to the trust - i.e. not as a dividend (which would be taxed in the hands of the beneficiaries) but as a contribution to the trust? This would allow the family trust to invest the money with the benefit of the CGT discount when it comes time to sell the shares. Any income from the shares held by the family trust could be distributed back to the company, which would pay company tax on these profits.

    Keen for your thoughts on this - thank you in advance.

    Syd Bogle
     
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  2. AnthonyKing

    AnthonyKing Active Member

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    Hello Syd Bogle
    You mean that your company holds all shares in your company?
    Who are the trustees for your FT? and has it got a corporate trustee?
    Once the above is advised you can consider at least 2 solutions to your query:
    1. Your company can make a documented loan directly to the trust at market rates and on market terms.
    2. Your FT could borrow through a special loan strategy we designed in 2004 - using our
    “TEBL™” Trust Strategy.
     
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  3. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Could you expand on this - at least in general terms?
     
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  4. Syd Bogle

    Syd Bogle New Member

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    The operating company is owned by a corporate trustee ATF the family trust. I am director and shareholder of the corporate trustee.

    Is a loan arrangement the only solution? Can the company contribute to the trust in the same way that an individual can contribute to the trust?
     
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  5. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I would have thought there would be tax implications of trying to do this - since you are moving capital, it's effectively a "capital gain" you are moving out of the company.

    After-tax money in your hands personally is yours to do with as you please, but money taken out of a company is a return of capital.

    ATO: Non-assessable payments

    "If you receive a non-assessable payment from a company (that is, a payment that is not a dividend or an amount that is taken to be a dividend for tax purposes), CGT event G1 occurs at the time of the payment. Under CGT event G1, you need to adjust the cost base of the shares. These payments are often referred to as a 'return of capital'.

    If the amount of the non-assessable payment is less than the cost base of the shares at the time of payment, you reduce the cost base and reduced cost base by the amount of the payment.

    If the non-assessable payment is more than the cost base of the shares, you will make a capital gain. If you make a capital gain, you reduce the cost base and reduced cost base of the shares to nil. The amount of the capital gain is equal to the difference between the payment and the cost base (that is, any amount remaining after your cost base has been reduced to nil). You cannot make a capital loss from the receipt of a non-assessable payment."​

    So, assuming the shares in your company are worth something like $10 or $100 (which is typical when you set up a company like this), then any capital you take out will be greater than the cost base and hence would result in a capital gain being triggered.

    If we were allowed to arbitrarily take capital out of a company and gift it to another entity without any tax implications, that would open up a whole raft of tax avoidance strategies.
     
    Last edited: 11th Apr, 2017
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  6. Syd Bogle

    Syd Bogle New Member

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    Simon, thank you for your comprehensive answer!
     
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  7. Terryw

    Terryw Well-Known Member

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    Div 7A
     
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  8. AnthonyKing

    AnthonyKing Active Member

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    Dear Syd
    Persons and companies usually contribute money (capital) at Settlement when the trust is created and they are Appointed as beneficiaries in the trust deed. Any later contributions are generally made as loans and best on commercial terms and via a TEBL™ strategy as per my recent post. Your trust appears to have your company as a 100% shareholder which is good from an asset protection view but not necessarily the best strategy for income distributions of after tax profits @ 30%, You should note that this structure also allows tax deferral to later tax years. A more tax effective strategy uses a SMSF and a Fixed Unit Trust which means that tax in initially paid at 30% for the trust but which distributes a FF distribution to the SMSF and claims the Franking credits less 15% net tax so net tax is 15%.
    We have been structuring real property and other investments since 1978 and so have a wealth of experience and its important to note that you can only structure assets beore you acquire them because that is when you make the structure decisions. After that it usually costs you CGT and Stamp Duty if you want to change, Do It Once - Do It Right!.
    Good luck Syd with your decisions.
    Anthony King
     
  9. Terryw

    Terryw Well-Known Member

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    At settlement of a trust the settlor contributes the initial capital of the trust. The settlor shouldn't be a potential beneficiary of the trust for tax reasons. Later contributions may be settlements of further cash by a beneficiary - gifts, or loans to the trustee.

    A Trust cannot have a shareholder, only companies have shares and can have shareholders. I think Anthony meant the company appears to be a beneficiary of the trust.