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Is Trust the way to go?

Discussion in 'Accounting, Tax & Legal' started by sjmerchant, 4th May, 2010.

  1. sjmerchant

    sjmerchant New Member

    4th May, 2010
    Sydney, NSW

    I am very new to the Trust concept and wonder if it will be useful in my situation.

    I am an IT Consultant contractor earning around 130K gross. Till October last year, I was on a PAYG setup. My account recommended I set up a PTY LTD company. I have done that now. My wife earns about 45K gross. We have recently bought out first home.

    My goal is to set up my financial profile in such a way that I'd have to pay least tax (don't we all) so I can afford to buy my first investment property.

    Someone mentioned the Trust concept whereby my partner and my income would be equally distributed. So I started reading up on it. The more I read, the more I got confused.

    You guys seem to know what you are talking about so wanted an opinion from you all as to what my options are and what's the best way to reach my goal.

    Cheers guys.
  2. GregR

    GregR Reid Consultants

    13th Jul, 2009
    Berwick Vic
    There are other posts relating to trusts but it is essentially an asset protection mechanism. If there is a risk of being sued personally, then you need to look at placing assets, including your own home (if possible) in another legal entity.

    For the PPOR, it may often be in the spouse's name solely.

    For investment assets (IP's), then a discretionary trust (DT) can work being a separate legal entity (suggest you use a name not associated with your own which makes it harder to track down). One issue with DT's is that negative gearing benefits cannot be passed across to beneficiaries, so stay within the DT. If the DT becomes profitable, then the losses can be used to offset and after that profits can be distributed to how the trustees determine.

    You may consider using a trading trust for your IT contracting, then have a DT set up as a beneficiary to that trading trust and distribute profits from the trading trust but you will want to make sure it is set up correctly and for commercial reasons, not just tax avoidance.

    For most people, using a DT for one IP is not worth the costs and additional paperwork so they purchase in their own name and are able to use immediate negative gearing benefits to reduce their taxable income.
    Good luck
  3. Simon Hampel

    Simon Hampel Co-founder Staff Member

    9th Jun, 2005
    Sydney, Australia
    For a discretionary trust, you actually get to choose who gets paid what from the trust profits. This means you can stream income to the person on the lowest tax rate to minimise your effective tax on that income.

    However, you are only actually distributing the income from the trust. If your business is owned by the trust, then profits from the business can be streamed through the trust and then ultimately into the hands of the trust beneficiaries. Similarly any investment profits made by the trust.

    However, any PAYG salary will not pass through the trust - it will be taxable directly in the hands of whoever earned it.

    Generally, if your partner is just an employee of some other company, you won't be able to "equally distribute" it. Similarly, if you pay yourself a salary from your business, that's taxable directly in your hands, and the trust doesn't come into it (the company would have to pay a dividend and the trust would have to be the shareholder of the company).

    Depending on the nature of your business and your plans for investments and such, one typical structure to consider is using a discretionary trust (with a corporate trustee) as your investment holding company, and have this trust own all your assets, including the shares in the company you run your business though (which will be different to the corporate trustee you use for the trust).


    My_Corporate_Trustee Pty Ltd As Trustee For My_Trust

    - All shares and property and other assets are purchased via this trust.
    - You and your partner are directors of the corporate trustee (ie you get to make the decisions about how the trust operates)
    - You are your partner (and any children and future children and anyone else you deem worthy) are beneficiaries of the trust (ie you get to distribute income to any one of the beneficiaries named in your trust)

    My_Business Pty Ltd

    - This is where you run your business
    - It is important to not use the corporate trustee to operate your business if your trust will also have other investment assets - too much risk
    - The trust above is the sole shareholder in the business
    - You (and whoever else you choose) will be director of the company
    - You can either pay yourself a salary from the company (which comes to you directly to be taxed) or declare dividends (which get paid to the trust and then can be distributed amongst the beneficiaries, complete with franking credits if the company already paid tax on that profit).


    Note that this is only one possible structure - and may not be the best suited to your actual situation. You really do need good advice about this stuff - hopefully I've been able to give you some suggestions that you can take to your accountant for consideration.

    Let us know if you have any other specific questions.