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Structuring the Ownership of Shares

Discussion in 'Accounting, Tax & Legal' started by Terryw, 14th Dec, 2016.

  1. Hosko

    Hosko Well-Known Member

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    Haven't added anything recently, sorry will try to contribute where I can in 2017
     
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  2. Intelligencer

    Intelligencer Member

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    Excellent infromation! :)

    At what amount of cash would it make 'value' sense to start using a Discretionary Trust to start buying? Ideally I'll be using a $30-$50k LOC for a lump sum but at the moment I'm only looking to invest ~$5k. Would a DT be around $1.5k to start and soemthing like $1k/yr to run? Those figures are in my head for some reason.
     
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  3. twisted strategies

    twisted strategies Well-Known Member

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    on a side note .. are we the only 3 ever on here??


    discretionary trusts and some other plans won't be needed for me .

    ( aka , holy crap i got a pension for Xmas ... only 3 or 5 years early )

    but i suspect many read , but aren't lured into posting often
     
  4. Hodor

    Hodor Well-Known Member

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    I believe it is more about the end amount you plan to have in the trust and structures used. If you are going to have a large portfolio then starting with the correct structure will be beneficial.

    Speak to a professional an initial consult should cost relatively little.
     
  5. Terryw

    Terryw Well-Known Member

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    I am not a tax agent, but you would probably be looking at around $1000 per year for preparation of trust financials and tax returns for a trust holding a few shares. So from a purely tax point of view you would be wanting to save at least $1000 per year in tax.

    It is hard to work this out as there are so many variables but imagine if you had say $5000 in taxable income from shares. If you held these shares in your own names you might be paying say 32.5% in tax (plus medicare!) = $1,725. in tax.

    If held in a trust you control you could cause this income to be distributed to your low income earning spouse who may pay no tax = $1,725 in tax saved of $725 more after running costs.

    You may say you could just buy in the spouses name - well you couldn't. Your spouse could buy the shares in their own name, but then you have lost control to a degree. You could maintain some control by lending the money though.

    But if bought in one name what happens next year when the incomes change and the spouse is now on the top marginal tax rate?

    A trust gives you flexibility which direct individual ownership doesn't.

    You may also have kids who may be going to university for 3 years - an ideal time to divert income to them from a trust. they will pay their own tax - which may be nil.

    Imagine if you had to fund them while they are at uni. To give them $10,000 in living expenses you may have to earn around $18k, pay tax and then be left with $10k to give them.
     
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  6. Intelligencer

    Intelligencer Member

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    Thanks @Terryw. So just before the ending of the tax year one would go to their accountant to figure out who best to distribute to for best tax benefits?

    When people say distribute to the person in the lowest tax bracket, is this only an "on paper" thing and they transfer it back? E.g. Husband distributes $10k profit to the non-working wife so he doesn't pay any tax on it. Once she receives the money, does he just transfer it to his account?
     
  7. Terryw

    Terryw Well-Known Member

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    Well the trustee would need to work out the income of the trust and then consider the potential beneficiaries of the income before distributing it.

    But in practice the person that controls the trust will work out who to give what from a very limited pool of potentials.

    If the trustee doesn't physically give the income to the beneficiaries they will have what is known as a UPE unpaid present entitlement which is like a debt owed to them. For this reason I think money should be moved and then i can be gifted around as suited.
     
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  8. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Yes, very much so - start with the end in mind.

    If you plan on building a large portfolio - then try and get the right structures in place as early as possible. While it may cost you more in the short term, over the long term the savings will be substantial compared to trying to move assets around later when it may incur transaction costs or stamp duty and such.

    Yes, it quite often is a paper distribution - but as Terry mentioned, if you do this the trust still does owe the money to the beneficiary and they can legally "demand" that money at any time - which may be an issue in the case of marriage breakdown, or if the beneficiary becomes bankrupt because it is a personal asset of theirs and it may not be the beneficiary actually doing the demanding - it may be a third party creditor.

    Some thought about the ramifications of the trust owing money to beneficiaries is important.

    That being said, it's quite common - just be aware of potential gotchas and consider whether paying the money out and re-gifting to the trust is more appropriate (although potentially less tax-effective).

    If the beneficiary doesn't work in a high risk profession and isn't likely to be sued and doesn't have significant personal financial exposure - then it's probably not much of an issue.
     
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  9. Ievgen Degtiarov

    Ievgen Degtiarov New Member

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    That's exactly what I'm thinking. In the short (even medium) term I can't see any financial benefit from this structure for our family.

    However, the flexibility in the long term would allow to optimize the tax paid. E.g. I'm considering the following simple scenario. If my spouse and I no longer work and want to live off dividends we could basically distribute 50/50. If we were to buy all shares in her name now (she is on a lower income and I'm on the second highest tax rate) and as time goes by and we accumulate large enough portfolio of shares (ETFs/LICs) she would have to pay a lot of tax in the long term.

    E.g. let's say there is $180000 dividend income. With shares in her name she pays $57,832 in tax. With the dividends distributed 50/50 via trust structure we pay combined tax of $22,732 x 2 = $45,464 which is a saving of $12,368 in tax.
     
  10. Terryw

    Terryw Well-Known Member

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    Many people would be using shares as part of their debt recycling strategy and this may include periodically selling them to pay off non-deductible debt and then reborrowing to buy them back.

    If this is the case the structure may not matter too much in the early stages as once sold they can be repurchased in different structures.
     
  11. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Shares are certainly easier to manage in this regard without the stamp duty costs associated with transactions.

    It's much more of an issue with real estate.

    I think Terry makes a good point - if you're predominantly going to be buying shares/funds/etc then the structure is not quite as important in the short term.
     
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  12. Hosko

    Hosko Well-Known Member

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    Yes, I'm working on the shorter term accumulation of cash through the sharemarket then will look to structure up when there is something chunkier to work with.
     
  13. twisted strategies

    twisted strategies Well-Known Member

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    regarding the 3 posters question ,

    i might suggest that the posters are the ones confident ( or needy enough ) to wrestle with the questions , others would be reading ( and maybe thinking )

    personally i looked at some of the paper work and chose quick , dirty and simple as time until target date was more important than tax niceties.

    regarding franking credits please do NOT assume ( full) franking credits as a given , as more investment-worthy companies source more income from overseas , franking credits may decline in the future .
     
  14. s0805

    s0805 Member

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    Thannks @Terryw for excellent info. It took me few attempts to grasp all mentioned still some clarification required...and I end up putting diagram to understand better...

    I guess this means if you lend money to trustee and get sued then money you lend to trust can be clawed back? Is that right?

    In what situations would you require to lend money to beneficiaries as beneficial? Is it when income produced by trust is too big to be distributed with not much tax savings?

    when you say control here, you mean ownership of company shares correct? In regards to corporate trustee?

    Can this be avoided with setting up corporate trustee where individual owns 100% shares? Can the interest rate be the same as what individual is paying to his/her lender?


    Can you elaborate on this? Only some members of family can be in trust? Apart from shares anything should not be owned by this family trust?

    Does that mean setup the separate trust as beneficiary of bucket company ? how can that fit in char below.... I am not sure what is the difference between discretionary & family trust…..however if one would like to use bucket company as compounder until dividends with franking credits can be distributed than only discretionary trust can do that?

    will this still help if you have >30% tax rate applied as in that case interest earned on lending & franking credits will still be high….

    Also, Where does appointer sit in below chart? Can trustee be the same person as appointer?
     
  15. s0805

    s0805 Member

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    diagram....
     

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  16. Terryw

    Terryw Well-Known Member

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    1. Loans are an offset of the lender. So if the lender becomes bankrupt creditors can get the benefit when the loan is repaid.

    2. An example is if a beneficiary wants to buy a property in their own name, a main residence perhaps. They could borrow 25% from the trust and 80% from a bank. Both loans could be secured by a mortgage – no equity exposed in the property.

    3. Shareholders generally control the company. But it will depend on the terms of the constitution.

    4. Yes, a company is a separate legal person. Any interest rate can be charged, but there are various consequences

    5. Beneficiaries of the trust won’t change, but for tax reasons the trustee can only distribute to certain beneficiaries that are related to a test individual. Because of this it might be better to hold difference assets in a different trust

    6. Bucket company shares should possibly be owned by the trustee of a different trust to that which the bucket company is a beneficiary of. There is no difference between a discretionary trust and a family trust – both a vague terms used to describe various trusts with which the trustee has some sort of discretion. I often see unit trust described as family trusts too. It is not the ‘type’ of trust that is important but the terms of the deed.

    7. Yes. It can be beneficial if your tax rate is 47%.

    8. The appointor is generally the person appointed by the trust deed that has the power to hire and fire the trustee.


    9.

    10.
     
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  17. twisted strategies

    twisted strategies Well-Known Member

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    indeed not , BUT this topic is well outside my skill-set ( or any qualifications )

    but do read in case i pick up an idea ( or a strategy to twist to suit me )

    good luck
     
  18. s0805

    s0805 Member

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    What is the main reason behind this. In that case you you'll have two separate trustees 1) for family trust 2) just for trustee of bucket company. Doesn't that complicate the control part of it....

    As in chart Mrs smith owns 100% share of bucket company as well as trustee as individual of discretionary trust. Can she play two roles like that one being 100% share owner of bucket company and also be individual trustee of DT?

    Example marriage breakdown may cause issues if bucket company used as compounder to accumulate earning & dividends before distribution phase.....Or am i missing something in chart?
     

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  19. s0805

    s0805 Member

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    been a member for long....spent lot of time in PC however should spend further time here as well. cheers
     
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  20. Terryw

    Terryw Well-Known Member

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    The bucket company will become very valuable potentially because money is going in, but not coming out. Therefore the shares of the company would be valuable. Shares are property that can fall into the hands of creditors on bankruptcy so if you held them and you went bankrupt the assets built up in the bucket company would be lost.

    Also if you own the shares there would be no flexibility in distributing income and franking credits.
     
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