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Discretionary trust CGT and questions

Discussion in 'Accounting, Tax & Legal' started by goponcho, 18th Aug, 2019.

  1. goponcho

    goponcho Active Member

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    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!
     
    Last edited: 18th Aug, 2019
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Hangon - the corporate trustee should not also be a beneficiary of the trust.

    The whole point of the corporate trustee is that it is "disposable", meaning that you can replace it if required.

    If you want to distribute to a company to save tax, then that's an additional company structure you require to be set up.
    1. Company A operates as a corporate trustee, holds no assets and generates no income. You (and spouse) would typically be shareholders and directors of Company A.
    2. Discretionary (Family) Trust B has Company A as trustee (bank accounts would be something like "Company A Pty Ltd ATF Family Trust B")
    3. Company C is listed in the trust deed for Trust B as a potential beneficiary, so that income can be distributed. This is a separate entity to Company A. Shareholder of Company C would be Trust B, you (and spouse?) would typically be directors.
    This is only one way to set it up - advice is required for your own unique circumstances (and if you are operating a business, things change too).

    Yes, you would typically want to distribute income to lowest income earners first. The only exception there is if that would impact on other entitlements they might have (eg govt pensions).

    Companies also do not get a 50% CGT discount - so you don't want to be distributing capital gains there.

    Good question on franking credits getting passed through to a company beneficiary - I'm not actually sure how that works.

    The trust has its own tax returns and is responsible for its own expenses. You can't claim those expenses personally. Similarly for the company beneficiary.

    There is no personal tax deduction for any of these costs - since they are not your expenses.

    The exception might be if you were to borrow money in your personal name and lend it to the trust - you could potentially claim that as an expense, but advice is required there because it gets complicated and there might be gotchas.
     
  3. goponcho

    goponcho Active Member

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    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!
     
  4. goponcho

    goponcho Active Member

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    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??
     
  5. AnthonyKing

    AnthonyKing Well-Known Member

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  6. AnthonyKing

    AnthonyKing Well-Known Member

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    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
     
  7. Terryw

    Terryw Well-Known Member

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    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
     
  8. Terryw

    Terryw Well-Known Member

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    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.
     
  9. Terryw

    Terryw Well-Known Member

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    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.
     
  10. goponcho

    goponcho Active Member

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

    goponcho Active Member

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    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.
     
  12. Terryw

    Terryw Well-Known Member

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    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.
     
  13. Terryw

    Terryw Well-Known Member

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    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.
     
  14. goponcho

    goponcho Active Member

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    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?
     
  15. Terryw

    Terryw Well-Known Member

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    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.
     
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  16. goponcho

    goponcho Active Member

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