Possible to have partnership with varying distributions?

Hi,

I've got an eBay business and currently I run it under a partnership between my family (but we didn't create any partnership agreement, only ABN & GST registrations). We just lodged the 08/09 tax return ourselves (without accountant).

Is it possible to vary the income distribution between different financial years? I've talked to an accountant and according to him, it's not possible and we need to create a trust if we want to do that. Is this true?

If it was possible to vary the distribution, what's the advantage in setting up a discretionary trust over a partnership, other than the limited liability issue?

Thank you.

 

I am assuming that you are actually a business.

I am assuming that you are carrying on a business that is not primarily the personal exertion of one individual that might be caught by the PSI rules (e.g. just Dad as an IT consultant who does all the work for one client but splits income with his family).

I am assuming that all family members are actually admitted to your partnership based on their genuine skill or exertion or contributions.

Now ...

Technically you can adjust partnership entitlements from year to year.

Firstly there must exist a partnership agreement that allows a such a determination.

Secondly it must be in such a way that it does not constitute a dissolution of the partnership each time !!

Thirdly it must not be part of a scheme with a dominant purpose of tax avoidance, to which Part IVA might apply.

So effectively your Accountant is erring on the safe side. Given the lack of formal agreement you might be deemed equal partners by the Partnership Act of your relevant State.

If you sell your business into a discretionary trust you need a good business reason to again avoid Part IVA applying to a scheme with a dominant purpose of avoiding tax by income splitting with beneficiaries.

Limiting the business liability is a good reason for the trust to have a corporate Trustee conduct the business, with business assets held in trust.

The transfer of ownership has income & CGT issues which you should discuss with your Accountant. There are many concessions on business transfers where beneficial ownership is similar, but discretionary trusts are tricky.

Waaaaaay too much to go into here.

Cheers,

Rob

 

Thanks for the reply Rob.

Those assumptions are mostly correct, but we want to be able to vary the distribution to minimise tax and not necessarily proportional to their contributions.

Yes we planned to set up a trust with corporate trustee. If we do that, will it most likely be fine under Part IVA?
Can we also use the same company (the corporate trustee) as one of the beneficiaries to retain income?
Also, to avoid Part IVA, is it recommended to register all family members as shareholders of the company (with perhaps similar shareholding proportions), or is it not relevant?

By the way, what did you mean by "it must be in such a way that it does not constitute a dissolution of the partnership each time"?

 

You will need to pay an Advisor to do their due dilligence and determine the most appropriate structure for liability, flexibility and tax-effectiveness.

Cheers,

Rob

 

With regards to my original question about whether it's possible to vary the distributions from year to year, I'm guessing the partnership agreement would have to show an exact formula or method to calculate the distribution and it cannot have too much discretion?

With a trust, is it okay to determine the distributions without any formula at all and it's completely up to the trustee's discretions, as long as a sound commercial reason (such as limited liability) can be inferred when the trust was originally established?

Also with a trust, if for example the trust distributes $xx to person B, but the money is really intended for person A. Then person B loans back the money into the trust for further use in the business. The trust then purchases a car (possible partially or wholly because person B loans back the money into the trust). If person A ultimately uses the car, will he need to pay fringe benefit tax or car rental fee? And if he pays rent to the trust, will the scheme be completely legal? I think because the rental fee is going back to the trust, there is no net loss for all the beneficiaries and trust collectively?

Similar scenario if the trust uses the money to buy a house, if person A actually resides in that house, will he need to pay rent to the trust? It's however unlikely that we'll do this due to loss of CGT exemption and first home owner's grant. Am I correct you'll lose these 2 benefits if the house is not bought under individuals' names?

I'll talk to my accountant about these as well but was looking for second opinions.