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From trust fund to trust fund - income tax?

Discussion in 'Accounting, Tax & Legal' started by kaatje, 4th Jul, 2009.

  1. kaatje

    kaatje New Member

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    NSW
    Hi all,
    Have posted this question on another forum, but hoping to get some other opinions.
    Apologies if it's been done, or I sound like a total newbie..... :)

    My partner and I operate a business as follows:
    We are directors of Company A (equal shares)
    Company A is corporate trustee for Trust A
    Trust A trades as a retail business, and is a discretionary trust, with myself and partner as listed beneficiaries (clause also allows related parties/companies/trust to benefit)

    Trust A provides our sole source of income as beneficiaries, neither of us have PAYG wages.

    We hope to purchase our first property - PPOR - this financial year. As such i've started to do some reading, and can't find anything to contradict what seems to be a HUGE gap in the tax system. I can't really find anyone saying anything similar, in fact, so can't help but feel like i've missed some fundamental element here!

    Plan to purchase said PPOR:
    Establish Company B, as corporate trustee for Trust B.
    Trust B is discretionary or family trust, and 'trades' only in purchase of PPOR.
    Trust B becomes a beneficiary of Trust A, receiving enough funds to service home loan (and as much more as possible, within Trust A's earning/profit capacity)
    Remainder (or as required to cover our living costs) of Trust A's profits distributed to ourselves or other beneficiaries.

    Profits transferred as a benefit from Trust A to Trust B are used completely to purchase Trust B's asset (PPOR). Trust B therefore does not make a profit for that year, and does not need to distribute to tax paying entities ie, no tax. (?!)

    The intent is to buy and hold, passing on to future generations through trust. Therefore we buy asset, but don't see a gain on that asset (in our lifetime) therefore do not pay tax....?
    I completely dismissed the idea at first as I thought there's no way it would be possible, until I considered that our retail business (Trust A) buys assets (trading stock) and may not necessarily make a profit on that stock (it does, but beside the point ) in that financial year, or subsequent years, instead carries over a loss - so how is it any different for Trust B to purchase our PPOR as 'long term' trading stock?

    This to me reads that the 100k (or whichever figure you want) per annum sent from Trust A to Trust B as benefit to pay for this asset is not subject to income tax, 'saving' 30k per annum on what would have been 30% income tax (apply whatever tax rate and figures you want - but get my drift)... And only limited to your businesses success/profits..

    Surely I've missed something.

    (Could also complicate things further by suggesting that to truly qualify Trust B as trading/income producing and eligible for deductions, Trust A pays market rent to Trust B for PPOR, or portion of as business premises - home office etc - offsetting any potential loss from expenses such as interest on loan, rates....? Or am I well off the beaten track here?)
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    In theory I think it could work, but you may need to look out for family trust declarations - I'll leave it up to the accountants to comment more.
     
  3. Superman

    Superman Well-Known Member

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    OK - interesting ideas you put forward.

    Sorry to put the brakes on this, but....

    Firstly, any income distributed to Trust B would be taxable income for Trust B - so you are just shifting the profit from Trust A to Trust B.

    Secondly, the property would be considered an asset, so you do not get a deduction for the purchase (unless you have a property development business - which you don't).

    Thirdly, the property is going to be your PPOR - so you get stamp duty exemptions, first homer owners grant and NO CGT anyway - so why bother putting it in a trust?

    Fourth [general info], Trust B would need to have a settlement period that finishes before the settlement date of Trust A - i.e. if Trust A has been going 5 years, then Trust B's settlement date would need to be 80 years less at least 5 years - this is to prevent the assets of the trust continuing for more than 80 years (rule of perpetuities).


    Also in regards to your trading stock, unless you are an STS tax payer and the variation in the value in your trading stock from 30 June one year to 30 June the next year is less than $10,000 you need to be doing a stock take - meaning your deduction for the purchase of your stock is reduced by the stock on hand on the end of the year (e.g. opening stock + purchases - closing stock = deduction).

    I know in New Zealand a lot of business owners and other people hold their PPOR in a family trust for potential tax savings however it is my personal opinion that in Australia it creates unnecessary complexity and additional costs.

    For all its complexity, the Australian taxation system achieves one thing - it makes you pay tax on monies you use personally.

    I would focus on making good profits in your business, and work with your accountant to legally minimise your overall tax and put in place a savings plan to purchase your PPOR in your personal names.

    Good luck with everything. :)
     
  4. Rob G.

    Rob G. Well-Known Member

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    Cheers,

    Rob
     
    Last edited by a moderator: 12th Jul, 2009
  5. kaatje

    kaatje New Member

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    Have just checked back in this thread after forgetting I posted here also,
    going to read into those points on the replies a little more thoroughly and figure out where I need to focus my *study* :)

    But firstly have to say THANK YOU for being so constructive and pointing me in the right direction - hard to find the info you need when you don't know where to look/what to google ;)

    Re: Using trust fund - we'd wanted to use it for asset protection, really.
    It's something we'd only recently (mid financial year) gotten onto with the business as recommendation from our accountant, and changed over business structure then, so this is our first tax return under this model. I'd previously traded myself as sole trader in a 'cottage' business - not much big biz knowledge needed there ;) . My last tax return I'd been able to do myself as such a small turnover and still working day job (offset losses against taxable income from day job) but obviously more complex with the trust structure/bigger turnover, and some fundamental factors in tax that I don't get to see this year after palming tax return/matters off to accountant to handle the tricky stuff.

    Had first looked at this idea as I figured we should protect the house in a trust as well, but aware that the FHB concessions + grants would be close to $30k for our price range of 500-600k. Wanted to make sure that it was really worth putting in a trust, and wondered whether that $30k saving could/would actually be offset in another way by having it in trust.
    Sounds like short of turning it into an investment property with a commercial lease (..? still need to read up on that) we'd not have any direct financial saving/benefit using a trust.

    I'm still keen on asset protection...

    Is there any other "incentive" that the trust fund could offer us to offset the government concessions?
    (Off to search the forum on that topic, also..)
     
  6. Rob G.

    Rob G. Well-Known Member

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    "small cottage business" ... "offset losses against salary"

    Was your "small business" operating at a loss ?

    Of course you got Taxation advice whether Division 35 prevented you setting off business losses against other income.

    Cheers,

    Rob