Discretionary trust CGT and questions

Hi guys,

Still exploring discretionary trusts, about to bite but weeding out a bit more of my understanding.

Say one creates a discretionary trust solely for share purchases with a corporate trustee as a bucket company. Also plan on debt recycling as we have a PPOR with plenty of non deductible debt.

Hoping to minimise capital gains with long term holds, with some income production along the way.

In regards to the dividend/distributions and capital gains, how should they be distributed optimally?
1) Income that is distributed to low income earners first
2) Then income would be distributed to the bucket company at 30% tax rate. (let's leave how to take it out for now). Franking credits can get passed through??
3) More importantly wanted to see what to do with CGT as they might be large over the long term with low turnover. If we if distribute to the bucket company would be able to time payout but we would forfeit the 50% CGT discount?? So plan would be to distribute to individual beneficary at any time a share was sold at a profit?

And regards to costs, are we able to submit returns for the discretionary trust (+/- another discretionary trustee to hold the shares of the bucket.) and bucket company. If not, are we able to deduct these yearly costs?

Thanks as always!

 

Hi Simon thanks for the reply.

I was actually planning on initially setting up as myself as the trustee, and then later adding a corporate trustee, in order to defer the initial costs involved. However, now that i think about it, that would trigger capital gains - so might be best to start off with the corporate trustee (Company A in your example)

Like you mentioned, we end up having 3 entities at least - adds up - so need a decent amount of money to make useful, other than the asset protection.

Thanks for the info regarding the costs for the trust/company - they should generate enough to utilise these deductions, and buffer their cost.


I will look into what happens to the franking credits once distributed to the company!

 

Alsooo:

1) Are we allowed to do the trusts/company returns as individuals or must they be done through an accountant?

Will start with an accountant but they should be largely the same year to year, and pretty simple.

2a) After we distribute to someone, are they allowed to just transfer it back to the trust in order to reinvest it? 2b) If were debt recycling, would the beneficiary gift back to me, and then i need to re-loan it formally with a contract back to the trust, every time i wanted to reinvest??

 

Dear Goponcho

The most basic law regarding any trust is that there must be a clear legal distinction between the Trustee (personal or corporate) and the "objects" of the Trust (beneficiaries). If you were the trustee AND a beneficiary the interests would merge and the trust would not exist. If you had a second person as trustee so that you both acted Jointly (i.e. as one) you would be fine. However you would be best to establish a company and appoint it to act as trustee. A tip: Don't forget to close your company Back Door against creditors - i.e. via the company shareholder/s.

Make sure that you have yourself and an independent Well Trusted Party as shareholders so that your company trustee cannot be compromised by legal action.

Regards

AK

 

It would be a mistake to set it up this way.
You would generally not want to name a company as a beneficiary in a trust deed, and having the same trust as shareholder and income distributor would be a reimbursement agreement and result in top marginal tax rate being applied.

Legal and tax advice should be sought to avoid potentially costly mistakes

 

Hi AK

I must disagree with these comments. A person can be a trustee and a beneficiary of a trust - just not the sole beneficiary as a person cannot hold an asset on trust for themselves.

I wouldn't worry too much about having a 3rd party as shareholder of a trustee company as this will introduce other risks and if a shareholder will become bankrupt the appointor can remove the trustee company well before this happens.

Legal advice should sought before setting up any company or trust though - from a lawyer.

 

Very generally
1) yes - subject to control and use of the funds and tax rates
2) yes. franking credits get passed on to the company
3) CGT - generally where a trust has a capital gain this would be distirbuted to an individual if the 50% CGT discount applies. This then results in tax being much lower than if the capital gain went to the company. company's will not get hte 50% discount so will pay 30% on capital gains, comapred to about 24.5% for individuals

Unless the deed specifies otherwise the trustee can prepare their own tax returns. But the trustee should probably not do this as there are a lot of things it has probably not considered such as family trust elections, reporting requirements, etc

Tax payers can claim their tax costs.

Don't forget all the other legal things too such as complying loan agreements, deeds of gift etc.

 

Was planning lending from myself &wife jointly to trustee myself. Beneficiaries would include myself, plus others. This would violate this principle?

 

Thanks Terry.
Can the franking credits get utilised by the company? Or must these be distributed to individuals to be used?

Regarding the CGT, once the company pays 30% tax on it, after distributing money to individuals they would also have to top it up to their own tax rate which makes it even worse.

Thanks for the input about the costs - points noted.

 

Franking credits go with the shares so could only be used by the shareholders of the company when the company pays a dividend.

Yes top up tax could apply.

 

You and your wife can lend the company as you are separate legal persons.

Make sure there is a commercial written loan agreement in place. I did a private ruling for someone recently and the ATO deemed their written loan agreement non-complying and denied the tax deductions - it was prepared by an online law firm too.

 

Thanks Terry, all those issues are clear in my head now!

Every time i think i am on top of it i think of another nuance to think about!

Any thoughts on the following?

 

a beneficiary can either lend or gift money to a trust, or leave it in there without taking it out - it will be a UPE, an unpaid present entitlement.

If debt recycling they would want to pay down their personal debt, reborrow and onlend back to the trust under a complying loan agreement.

 

Thanks Terry for all your help. That all makes sense and really helps!