Big capital gains

For someone who has made over $1m realised profits on shares (some held for over 1 year, some less), all held in family trust, generally what are some ways to distribute this to minimise tax?

Of course I will be seeking advice from an accountant but just wanted to get all bases covered in just something is missed.

Right now my thinking is that I can max the super contributions for myself and spouse for the last 3 years. Income will be distributed to ourselves up to a certain amount to be most tax beneficial. The rest to go in a company at the company tax rates. Anyone can think of anything else I can do to?

Thanks

 

Ask if the return of capital ie the capital gain treated differently to income? That is do you need to put your income towards super (& be in a lower tax bracket) then take the CG?

Is the nett effect the same?

 

Hmmm. Distributions to a company wont be full and final tax and Div 7A issues can impact this route. Of course companies will receive the CGT income and the final tax rate to a company for the discount gain element is at least 6.5% HIGHER than if the CGT amounts are distributed to individuals even at the top tax rate. And if the individuals receive non-discount gaisn it may be wise to offset the deductions for super against this to achieve the best tax effect. I suspect issues of income streaming will be a important element of tax planning you havent even considered.. Can a trust just steam the discounted gains ? Not likely. It can usually stream CGT amounts but not a subset within that so prudent advice on effective streaming and also issues surrounding trust elections and more may be required.

eg Max tax rate for individuals on CGT can be 24.5% v's a company at 30%. Paying 24.5% would be full and final where 30% is NOT full and final and a further 26% could even become payable later. So good planning could consider just accepting the inevitable and paying 24.5% now. Then...
Super deductions can be a effective way to address some deductible benefit however that comes with preservation but the long term investment returns can be then taxed at a far lesser rate of between 10-15%.

Tax planning is best achieved through personal tax advice.

 

Do the super catch up.

Send the discount capital gains to yourselves.

Send the non discount gains to your company.

Consider triggering capital losses if you have any.

Prepay costs if you can.

Do a cashflow forecast for your tax costs including deferred taxes under Div 7a.

Make sure the tax strategy advice is documented and includes reviewing the deed and the trust resolutions are done by the same advisor. Often the advice is easy and the implementation is hard.

Congrats on your success. Obviously that is now your low watermark year and you need to improve on that for next year.

 

Can you distribute over two financial years?

 

Increase expenses and reduce income

 

Trusts must determine net trust income and distribute it (make a beneficiary entitled rather than pay them!!) all in that year or the trustee faces the top marginal rate of 45%. Trusts cannot defer tax. A company beneficiary can partly defer tax. Its not quite the saving many think but for very high incomes it could be a strategy.

 

Thank you Ross and everyone else for your help. This was exactly what I was after.

From these posts I also realised the company tax rate is 30% for capital gains and not the standard 26%, oh well.

 

Classic example of why tax planning and exit strategy on gains is so important.

I see a low of people on the forum too busy chasing massive gains...only to see the govt walk away with up to 30-40%.

Something to thunk about....

 

The tax rate for a company may vary between 26-30% and no CGT discount occurs. However its not a final tax rate. The full and final tax rate can be above 55%. ]
The tax rate for the HIGHEST marginal tax rate individual is 24.5% (incl medicare) if the gain is discounted and 47% if it isnt.

There is also the ability for a trustee of a trust to be assessed on CGT amounts and this can be a effective tax rate of 22.5% ! ie No medicare levy. Even many tax advisers miss that. Its easy for many to think trusts "must" distribute and overlook the option that the trustee doesnt need to distribute and can even elect to be subject to tax and it may even save 2% or more.

One of the benefits of using trust proficient property tax focussed advisers.

 

I've never heard of this or considered this as a strategy.

So lets say, you finish June tax planning and you have a trust with a net capital gain of 2.36m. You could prepare the distribution minutes with a 180k going to Mr & Mrs, with the trustee to be taxed on the remaining 1mil, which would save them 40k due to a reduced Medicare Levy.

And there's absolutely nothing wrong with this?
Would a corporate trustee could tax to be paid on the gross gain rather than net?

 

Yes that is a legitimate strategy. The trustee can be assessed under s99 ITAA36 if no one is presently entitled to the income and s115-222(2) ITAA97 applies to the discount capital gain.
INCOME TAX ASSESSMENT ACT 1997 - SECT 115.222 Assessing trustees under section 99 or 99A of the Income Tax Assessment Act 1936

 

So are trust with corporate trustee would only be assessed on the net gain?

 

Does this require the trustee to be an individual and not a company?

 

It doesnt matter who the trustee is. The TRUST is the tax entity. The deed does need to be considered to ensure the trust has powers to retain income and also stream CGT amounts. Of course prior to 30 June of the year the trustee needs to have resolved the distribution and it cant tax plan this matter after 30 June. I just did one of these returns yesterday after the trust resolved in June to retain all CGT amoounts over and above $16K. The $16K was distributed to a specified beneficiary who had c/fwd losses just under this. The trustee paid tax on the balance. This kept the gain from pushing the beneficiary income over the Div 293 limits. Saved a extra 15% tax on $25K of contributions ($3750) plus 2% medicare on $140K. ($2800) and $16K as tax free ($7520). Total savings $14K on a $300K approx gain.

I often get asked if Part IVA applies. No. A taxpayer is allowed to utilise tax law and plan to save tax.

 

Yes. Assuming the net gain is a discounted gain. One other benefit can be if the trust has a c/fwd loss. The discounted value of the gain is the sum that uses the loss. This is different to the case of CGT losses which offset gains leaving a net gain that is halved. So 50% of the loss is reduced. But not income losses. You get to use 50% less losses. Its common that this can pose a benefit.

 

could be an individual trustee too

 

And in some cases the trustee is taxed on beneficiary income in any case eg minors and some non-resident issues

 

Thanks guys, very cool tip.
What happens to the net funds after tax, what do they look like in the financials?

Loan to trustee?
Retained earnings?
Trust corpus?

 

It would not be a loan but corpus of the trust which could potentially come out tax free in the future