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Structuring the Ownership of Shares

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

  1. Terryw

    Terryw Well-Known Member

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    One trust may want to contract with another in situations such as

    - Lending

    - Leasing

    - Purchasing

    - Mortgaging

    - Option agreements


    Plans often change so what starts out as a trust only owning shares may be a trust investing in property for example.




    It will depend on the situation. A company might be better for investing in real property in NSW for example because of land tax.




    Shareholders of publically listed companies are unlikely to be sued in relation to the company. But shareholders of private companies may be drawn into disputes as they may have to sue the company or the directors, for example if a fraud has been committed.


    Loans need to be repaid. Div7A loans are PI over short periods so the repayments will be high. The company doesn’t need to lend any further money, but the trust would need to repay what it is borrowed – either accelerated or over the term of the loan.
     
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  2. J_Lee

    J_Lee Member

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    I'm curious if anyone here understands non resident tax law enough to converse on the subject.

    In an example scenario where a Discretionary Trust distributes 100% of income (which is 100% Australian sourced income) to the sole beneficiary who is a non resident, what are the tax implications?

    Reading through this guide
    Taxation of trust net income - non resident beneficiaries: General overview of the changes
    it appears that all of this income is taxed at the top non-resident rate of 45%. Is that what others glean from this?

    If so this would be a incredibly expensive way to buy asset protection for someone who intends to continue using the trust after becoming a non-resident.
     
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  3. Terryw

    Terryw Well-Known Member

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    Trustees are taxed initially. This is because it is hard to chase a non-resident.
    But then the beneficiaries would be taxed and get a credit for the tax paid by the trustee.

    It would depend on what sort of income.
    non-residents can't get franking credits refunded and don't get the 50% CGT discount.

    Consider a corporate beneficiary with a resident director - if you don't need access to the funds right now.
     
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  4. J_Lee

    J_Lee Member

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    Hi Terry, thanks for the response. Can a corporate beneficiary with a resident director distribute company income to non resident share holder?

    Or to put it another way, is there a legal way to receive franking credits as a non resident?

    I plan on maintaining my residency for some time however the ATO may choose to classify me as a non resident sometime in the future.
     
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  5. Terryw

    Terryw Well-Known Member

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    Yes
    Not directly
     
  6. J_Lee

    J_Lee Member

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    Scratch those last questions, I've found the answers

    My scenario is not that unique and probably applies to a lot of retirees looking to move abroad

    Consider a scenario where;

    You are living off 100% fully franked Australian shares residing in a discretionary trust, producing $45k pa of grossed up dividends; and

    you live permanently or are travelling oversees. You have the option to gain tax residency in a country that does not tax on worldwide income, however you are still, deliberately, currently a tax resident of Australia

    Now consider this possible future event that is somewhat out of your control;

    The ATO categorizes you as a non-resident for tax purposes

    You have a decision to make,

    First you look at your income figures;

    Income figures for resident individual beneficiary
    (This is what your figures currently look like)
    Dividend Income................ $32,000
    Franking Distribution.......... $13,714
    Tax Payable....................... $7,332
    Franking Credit Return...... $6,382
    Annual upkeep costs......... $500
    Annual Net Income............ $37,882

    Income figures for non-resident beneficiary
    (This is what your figures will look like by the end of the FY if you do nothing)
    Dividend Income................ $32,000
    Franking Distribution.......... $0
    Tax Payable....................... $10,400
    Franking Credit Return...... $0
    Annual upkeep costs......... $500
    Annual Net Income............ $21,100

    Income figures for corporate beneficiary
    (These figures are only relevant if you don't require dividend income, which you do)
    Dividend Income................ $32,000
    Franking Distribution.......... $13,714
    Tax Payable....................... $7,332
    Franking Credit Return...... $6,382
    Annual upkeep costs......... $1,500
    Annual Net Income............ $36,882


    Income figures for individual non-resident
    (These figures are only available if you gain a new tax residency overseas)
    Dividend Income................ $32,000
    Franking Distribution.......... $0
    Tax Payable....................... $0
    Franking Credit Return...... $0
    Annual upkeep costs......... $0
    Annual Net Income............ $32,000

    Based off the above figures your best bet is too return to Australia and recover your tax residency status, if this is not an option your second best choice is to close the trust and re-domicile the assets overseas

    In doing so you will trigger a CGT event on the assets inside the trust. You should consider the following;



    How much capital gain/loss has occurred inside the trust

    Will you return to Australia as a tax resident in the future

    Now, having the ATO classify you as a non-resident when you have $750k worth of taxable assets, and you claim to be travelling oversees; you will probably get away with keeping your Australian tax residency for at least 2 years (this is what the ATO's website infers)

    Ultimately someone in this situation needs to take some best case guesses on future events and try and position their ownership structure with more potential upside favor verse potential downside risk. You can never how the whole story will play out, but arming yourself with the full understanding of potential pitfalls will help guide future actions/decisions

    How am I looking so far?
     
  7. J_Lee

    J_Lee Member

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    Ah, thank you Terry, perhaps I received the incorrect information. I have been led to believe that there in no direct nor indirect way to push franking credits out to a non-resident
     
  8. Terryw

    Terryw Well-Known Member

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    Well that is correct. the indirect way would be to keep the income in the company until you become a resident again.
     
  9. Peter_

    Peter_ New Member

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    Debt recycling has been explained elsewhere, but of interest to many would be how it works in practice via a Family (discretionary) Trust? Typical but common scenario below.

    Scenario: (keeping numbers simple but unrealistic) – Husband = high tax bracket, wife = low tax bracket, both trust beneficiaries. Husband redraws $100k from Loan A (investment loan in his name) at interest $5k p.a., advances as a loan to the Trust.

    New $100k Trust share portfolio setup and at EOFY $7k net dividend + $3k franking credits ($10k gross), with $5k interest cost. Trustee now wishes to use proceeds to pay-down LoanB (non-deductible loan in joint names with husband & wife). ie debt recycling.

    How and what amounts should be distributed (and to who) that pays down LoanB and that minimises the tax bill (e.g. via low-tax rate wife). Net income is positive so a distribution can be made.
     
  10. Terryw

    Terryw Well-Known Member

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    Simply put the trustee would distribute to the wife, and she would reduce the non-deductible debt.
     
  11. Terryw

    Terryw Well-Known Member

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  12. Peter_

    Peter_ New Member

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    Thank you. To clarify from the article you referenced:

    "The trust would then invest the money, pay the interest on the loan, and any profits would come back to one of the beneficiaries as income."


    For "pay the interest on the loan" above, given dividends are on a different payment-cycle to bank interest - is it efficient for any dividends to be distributed by the Trustee & deposited into the offset account for the non-deductible loan, and interest is then debited by the bank from this offset account for the deductible loan?

    And I confirm from reading the articles on this forum (helpful) that if gross dividends > interest at EOFY, then at tax time 1) the lender has a nil tax position (bank interest offset by interest repayment by Trustee) and 2) the remaining profit is declared for the low-tax rate beneficiary and remains in the non-deductible loan offset account (after bank interest-debits).

    If gross dividends < interest at EOFY, then franking credits are lost forever, however, net loss can be carried forward. Consequently the lender wears a deductible interest charge for the amount not repaid by the Trust.
     
  13. Terryw

    Terryw Well-Known Member

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    You would be onlending the money to the trustee. The trust would pay interest to you and then you pay interest to the bank.

    In order to do this there has to be some cash flow so you may want to lend the trust a bit more than the amount it will be investing so that it can pay the interest monthly.

    The trustee must keep its money separate from your personal money so there should be no co-mingling of funds.

    Like any tax pay if the expenses exceed the costs there is no profit. For dividends to be distributed the trust must make a profit of at least $1.
     
  14. Peter_

    Peter_ New Member

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    Thank you, this clarifies things. Will be advised by a professional, but have an improved idea of the general concepts from reading the most helpful articles on this.
     
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  15. Peter_

    Peter_ New Member

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    Thanks for your answers above - I met with my accountant but forgot to ask her this question:

    If carried-over losses trapped in a trust exceed the net dividend income at EOFY, can you offset just part of the losses so trust law income = $1 (& franking credits are distributable) and the remainder of losses are carried over?

    e.g. Assume Trapped losses = $10,000. Net Dividend = $7,000. Franking Credits $3,000.
    At EOFY Trust Law income = $7000 - $6,999 (trapped losses) = $1.
    Remainder of trapped losses of $3,001 (=$10,000 - $6,999) are carried over
    $7,000 cash is distributed to single beneficiary + $3,000 franking Credits.
    Taxable Income for Single Beneficiary = ($1 + $3,000) - tax @ marginal rate + $3,000 franking credits. Is this correct?

    Many thanks.
     
  16. Terryw

    Terryw Well-Known Member

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    Peter - I don't think so
     
  17. hash_investor

    hash_investor Member

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    i don't get it. how can a company 'retain' the income.
     
  18. Terryw

    Terryw Well-Known Member

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    By not declaring a dividend.