Hi All, my first post. I'm wondering if the following investment structure is possible/makes sense (from a tax perspective). A discretionary trust is set up (with corporate trustee) to hold investments - shares, property etc. It pays a distribution to a 'bucket' company beneficiary. The trust then borrows back this money from the bucket, using it to reinvest. Alternatively, I borrow from the bucket company, and then on-lend this money to the trust for investing. The interest on the borrowing by the trust is tax deductible right? I'm aware of (at a basic level) Div 7A but assuming everything here is executed correctly, it's ok? Looking at investment holding structures, again keeping the conversation purely on tax (and I am in the top bracket), it seems to me that it hardly matters what you do with complex structures, at the end of the day the money ends up with you/your spouse/your dog taxed as personal income i.e. 50%. And the structure I mentioned looks good for kicking the can down the road indefinetly, keeping tax at 30% in the meantime. When there are capital gains on assets in the trust, those are distributed to me/wife, not bucket.
The trust is an associate of a shareholder of the bucket company. So the loan will need to meet the minimum payment and interest rate cost. The interest is still tax deductible to the trust and tax assessable to the company. But the minimum repayments are an issue. Eventually you will need to put cash into the company or declare a dividend to clear the trust loan account. I would not go that far.
Division 7a isnt the big scary beast many accountants make it out to be. In fact it can be a useful planning tool. 1. First year loans dont require minimum loan repayments. A great tax deferral strategy. 2. Minimum repayments will be less than the profits so again a good tax deferral strategy. 3. Could have a secured loan on the division 7a loan and minimum repayments can now be made over a huge 25 year period. So provided it is all done properly there may be no issues at all.
So true. I think the problem is that accountants assume (because they have seen people try to do it so many times before) that the repayments (like trust distributions) are only on paper and the money never actually moves.
Bucket company could invest itself or better yet lend to another company to invest. But lending to a related trust on interest is no big deal as it will be deductible to the borrower and income to to the lender. Plus minus zero
Thanks everyone for the replies. Yes, but it still feels like an infinite loop - the trust just keeps drawing new loans, and that could include new loans used to pay down old loans. Doable? Alternatively, to declare a dividend as you've mentioned, would this work as well - the corporate trustee is the sole shareholder in Bucket. Bucket declares a dividend - and all of this money just ends up back in the trust. The loop continues. Mike - yes when I briefly looked at the Div 7A thing, that was my impression - that at the core of it this was within the rules, and what all the 'red alert' stuff came back to was people not actually moving the money and executing it correctly. My thoughts in terms of cycling everything through bucket and then straight back to the trust to invest were that the trust has discretion/streaming ability so better to be owning assets there. Bucket only owns loans. I might be missing something?
Yes it might be better for the bucket Co to lend to a trust which invests because of the 50% cgt discount plus extra streaming ability
What is your reasoning behind this? Why wouldn't the trustee just borrow from the bucket company? Adding in the extra layer of your involvement means less asset protection and extra risk with the extra loans.
There may be issues where the shares of the bucket company are owned by the same trust that distributes to it. I am not sure what these issues are but it would be good to have 2 trusts going.
If a trust owns the shares of the beneficiary company then the company shares may be owned by the trustee company. If that is the same company then there is a Corporations Act issue and contractual issues perhaps. A company cant own its own shares. The issue of whether the nature of the trust is at risk would also need legal advice. It could be that the sole assets of the trust are the assets of the company and hence the trust merges. Maybe. A active income trust and a investment trust are often better. One owns things and other produces income. Legal advice on asset protection between two always wise.