Company investing through Trust

Hi everyone,
I'm a newbie, so hopefully I've got this question in the right place

I've been considering a new investment transaction, and wondered if anyone could advise if I'm missing any issues. I'll try to give as much background as possible ...

Background ...
I have operated a trust structure (with inactive corporate trustee) for a number of years to protect family assets. Until now, all assets in the trust have been contributed from personal wealth, with some personal borrowings to provide a conservative level of leveraging. The trust is cash positive and distibutes all income to the family beneficiaries. The interest on borrowings is significantly less than the cash distributed by the trust.

My wife and I are also sole shareholders of a trading company which has built up a significant amount of cash in recent years. We are reluctant to take the cash out, even as dividends, due to the tax implications.

The Plan ...
What we are considering is to have the trading company contribute its spare cash to the trust (buy units), the trust will borrow additional funds and use the total amount to purchase an investment property. The property will be a trust asset owned by the corporate trustee atf the trust.

The property will be licensed to the trading company who will manage the investment, cover all outgoings, and receive all income. The licence fee will be equal to the amount of interest due on the loan -> net result to the trust is zero.

In addition to the licence fee, the trading company will contribute capital to the trust which will be used to increase its unit holding, and thereby reduce the balance of the loan.

In the end (~5 years downtrack), the trading company will hold units equal to the property purchase price, the loan will be repaid, and the licence fee will be effectively zero, meaning that the trading company will then derive significant income from the property without actually owning it.

Potential issues ...
Would the contribution of capital from the trading company to the trust have any Div 7A implications?
Protection is not the major goal here, but does this protect the trading company cash in any way?

The big Question ... does this make sense, or should we just get the cash out of the Company, cop the tax and then invest it through the trust in the usual way.

Another kind of related question which arose in our thinking was whether it is a good idea, or even legal, for the (capitalised but otherwise inactive) corporate trustee to purchase units in such a trust and thereby become a beneficiary too??? (This could be used to self-finance the investment - although it seems too good to be true, and you know what that normally means !)


Many thanks

 

There shouldn't be any Div7A issues provided there are no loans directly or indirectly to yourself and your wife as the shareholders in the trading company - it is simply the company making an investment.

You will not be protecting the companies cash - you are just converting it from a cash asset to units. If something happens to the company, any liquidator / administrator has to recover the investment - meaning they will try to sell the units or realise the underlying investment to cash up the trust and repay the money back to the company.

I am not sure about the strategy you mentioned in regards to the investment via the trustee company. You mention the trustee company is inactive - I believe it should stay that way.

If you want tax effectiveness, with superb asset protection, I would look at investing via an SMSF with an instalment warrant structure. This would actually enable your trading company to claim tax deductions of up to $25k each for yourself and your wife (or $50k each if you are over 50 years old).

Drop some funds in prior to 30 June and some more after 1 July to get a double whammy in there to form the deposit for a property.

You may need to read up on this strategy - but I reckon it may be worth looking into and seeing if it is suitable for you.

Feel free to ask more questions

SM

 

Hi SM,
Ok, so no Div7A problems, but the asset is not protected at all.
That's pretty clear cut. Thanks SM.

We started our SMSF back in the good old days when you could couple it with a Unit Trust to get it going quickly. Its now chockers. So other than the mandatory contributions from some part-time work we do, there's not much point in putting more cash in there.

Regarding the trustee company ... it does not trade in any way but for historical reasons is holding a fair bit of capital in passive investments at the moment.. i.e. on deposit. We don't want to get it involved in anything more aggressive than that anyway because of its role as trustee. So having it contribute some of that capital to the trust seemed like a way of using the capital more effectively without really putting it at any additional risk.
As you say, maybe it's not a good idea? Although I'm not sure why ?

e

 

Yeah - I don't believe there is a thing as having too much money in super - especially if you are getting close to that magical age when you can kick off an income stream from it and make all the earnings and CGT = 0%

There are no longer the RBL limits

With the intro of the new super instalment warrants / borrowing rules, it does create opportunities to have some gearing similar to the old pre-99 unit trusts.

You cashed up trustee company could even become the lender and act like a bank to fund some of the purchase costs.

Maybe check out some of my other posts and the attachment (provided for information purposes only) to find more info on the instalment warrants.

OK - I will assume that your trust previously distributed income to the company to cap the tax on the earnings @ the 30% corporate tax rate. It is good that your trust has physically paid the cash to the company as the ATO released a nice little draft tax ruling just before Xmas last year stating they may start treating unpaid trust distributions to companies as Div7A loans - however by the sounds of it this will not apply in your situation.

So, yes - your company could provide a loan or purchase units in the unit trust. This would mean the company will receive either interest or distributions and pay tax @ 30%.

Once again this should be OK from a Div7A perspective providing the trust does not have any debit loans out to the shareholders.

Another item you should look at is the directorships of the trading company. Typically it is good to have one person (normally the husband) take on all the risk associated with a trading company, and have all the family assets controlled by the wife who will be director of the trustee company and also the appointer of the trust. Making these slight changes can have good asset protection advantages.

Hope this helps
SM

 

As well as believing in diversification, I'm also a cynic. I don't trust any government not to fiddle with the super rules before I get to the stage of being able to collect in about 10 - 15 years. Probably by the time I "retire" it'll be taxed like normal income, we'll be restricted to living on $100k a year or something stupid like that, and anything we don't spend before dying will be taxed at 90% (Yes, I have lived in other countries, and am familiar with some of their more interesting practices !)[CYNIC OFF]

So, given that I think I've got enough in super to live very comfortably from when I retire to when I'll probably pop my clogs, I'm much more interested in the next 10-15 years. A positively geared investment structure which provides tax effective "pre-retirement" income is the current strategy.

Having said that, I will have a look again at the use of Instalment Warrants. I had a look last year, and actually went as far as an informal "approval" from my business banker to say that we could do it. However, we ended up not proceeding for various reasons. Maybe some good 10+ year CG targetted assets wouldn't be a bad thing, despite my cynicism

Would you be prepared to give an opinion on what you might consider "too much" - $3m, $5m, $10m etc or are you really so confident that money in super is just safe money in the bank... so to speak ???

That's good, and we don't have any debit loans to beneficiaries/unitholders.

SM, thanks again for your valuable comments. We have two accounting firms that we use regularly, but I find that neither are very skilled at this kind of strategic thinking.

cheers
e

 

Happy to help

Let me know if you want a referral to someone who can advise you in Sydney.

SM

 

Ecosse,
I am like you a cynic of governments and have no faith in them not changing the rules relating to superannuation. Costello has a lot to answer for.

I follow the part of your company purchasing units in a unit trust (or hybrid) and the trust then buying an investment property (or more) with leverage (or not) to equalise the profit/loss equation but unsure why you would go to the trouble of licencing to the trading company.

Alternatively it could be loans by the trading company to a trust as well who uses the funds to purchase an IP as long as it is well documented and on commercial terms. It gives wider scope for the trust vehicle.

The suggestions by SM are sound. Beneficiaries of the trust could include a corporate (30% tax rate) and other trusts. The difficulty with SMSF and leverage is the ability to use the equity to further increase your wealth or assets and the risk of government changes to rules again.
I would be interested in hearing the path you eventually take.
Good luck with it
Greg

 

Hi Ecosse,

In relation to your original post, there shouldnt be any Div 7A problems if the the company is purchasing units, providing cash doesnt then move from the trust to individuals.

However from a tax point of view, you would be better to own the property in a discretionary trust so Capital gains can flow to individuals who can take advantage of the CGT discount. Income could flow to the company if you want it to.

I also see some problems with the licence fee equalling the interest on the loan. I cant see how this being a commercial arrangement, so you might run into trouble with the deductibility of interest or licence fee in one or both entities. It also seems overly complicated, and the same result could be achieved by other means.

If the purpose of the strategy is to be able to use the companies cash to make the investment, there are quite possibly ways to get the funds out legitimatley without the need to pay dividends and with out creating a Div 7A problem.

I hope this helps, let me know if i can help further.

David