Some Questions on Trust/Company Structure

Hi Guys,

Just a few question in regards to some company/trust structure.

Currently we have a P/L company with annual revenue of 100K
In the future this may go up by 3-5 times and we are thinking about restructuring the setup.

Company P/L - 100 Shares - 2 directors own 50 shares each.
We are looking to set up a trust and thinking what is the best way to go.

1) Setup a trust with a non trading company as the trustee. The trust then controls our trading company ?

What are the benefits ?
Do the directors still have the risk of being liable when sued ?

2) Setup a trust above the trading company ?

Please advice pros/cons..

 

hi

There are many things to consider here.

Firstly, when was the company set up - is it pre CGT? If so transferring control may make it a post CGT asset.

Assuming it was set up after CGT come in, then transferring shares will be a CGT event. You will be required to pay CGT on the transfer at the market value of the shares. Valuation a company is very hard to do, so there may be ways to minimise the value to save on tax. You may also be able to transfer some shares over different tax years to save.

Stamp duty may also be payable on the transfer of shares in some instances and this will vary from state to state.

Asset protection issues also need to be considered. If you transfer shares you personally own for under market value and then you later go bankrupt, then these shares or their value could be clawed back. The rules are complex and the time period differs depending on how it is done, but if you do it with the intention to prevent creditors getting at your shares, the claw back may be indefinite.

Also, how is your trust going to pay for your shares? if you loan your trust money to pay for your shares, then this loan is your personal asset, ie property which could pass to your trustee in bankruptcy (if you go under).

Also, having two directors means double the risk - but this may be require to maintain control over the company.

If all your trust is going to do is to own shares, then there is no real risk for it. A shareholder is not liable for any debts of the company, usually, so it cannot be sued. So having a company as trustee may not be needed, but it may still be a good idea as it keeps ownership clearly separate.

The benefits of using a discretionary trust are that you will not have an interest in the trust, so if you go bankrupt then the trustee in bankruptcy cannot get at your trust assets. But if you have loans, or gifts to the trust or are not being paid by the trust for your work, then the bankruptcy trustee may be able to claim from the trust. So you need great care when doing this, especially with an existing business.

The trading company will still require directors and will be run as before. Directors will still be at risk, it is just the shareholders that will be changing. Think of transferring your BHP shares to your trust - it is still business as usual. - that reminds me, there are issues with franking credits with discretionary trusts so see your tax advisor too about this.

You should also consider setting up separate trusts to own company assets, intellectual property, provide services. Spread your eggs.