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Can a corporate beneficiary be wholly owned by the same Trust?

Discussion in 'Accounting & Tax' started by Freester, 17th Aug, 2016.

  1. Freester

    Freester New Member

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    Can a Trust be a Shareholder of a Company who is also a beneficiary of that same trust?

    I have proposed the following structure; parts of this structure already exist, new entity is ABC Pty Ltd;

    - XYZ Trust has 100% shareholding in new company ABC Pty Ltd. It also owns 50% of a Trading Company LMN Pty Ltd which provides the trust with significant dividend income.

    - ABC Pty Ltd is also a beneficiary of the XYZ Trust. LMN Pty Ltd is not a beneficiary.

    - XYZ Trust also has a separate Corporate Trustee.

    - XYZ Trust invests in long term property, has the benefit of CGT discount.

    - ABC Pty Ltd invests in short term property developments, treats property as stock.

    - ABC Pty Ltd accumulates distributions from trust and pays only 30% tax.

    - Profits within ABC Pty Ltd are reinvested for further property development within the company.

    - At some point in the long term future ABC Pty Ltd will need to pay dividends to XYZ Trust. XYZ Trust then distributes dividends to all beneficiaries except ABC Pty Ltd.

    I can't see any UPE or Div7A issues, can you?

    Is this possible, can anyone see a hole in this scheme?
     
  2. D.T.

    D.T. Adelaide Property Manager Business Member

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    I think you'd have a null trust issue
     
  3. Scott No Mates

    Scott No Mates Well-Known Member

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    Akin to a lessee buying the premises and nullifying the lease
     
  4. Daniel Taborsky

    Daniel Taborsky Well-Known Member Premium Member

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    The trustee cannot be the sole beneficiary of a trust, but that is not what is happening here.

    I can't think of any reason why a company owned by a trust cannot also be a beneficiary of that trust.
     
    Last edited: 17th Aug, 2016
  5. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Good question.

    You said "a scheme" ??? Dangerous words to use if there is a tax effective reason for this structure. Which I think may exist.

    I dont see any concerns other than UPE, valid trust resolutions. XYZ appears to have earnings for two company investments - LMN and ABC as well as its own derived income from long term holding of property. The question is whether it is in the nature of a capital gain or held to produce profit ?? The key concern is that any eligible CGT subject to discount can be streamed to a beneficiary that can use the discount ie a resident human.

    Thats where I see two issues that are related and circular perhaps.
    1. Scheme ?
    2. Is nature of the "CGT profit" really a CGT event or ordinary income ? Its possible that an enterprise could exist across the "group" and one could taint the other.

    3. Deed needs review to determine if streaming is permitted.
    4. Care needs to be taken that trust distributions are valid. Get it wrong and the trustee would be assessed.
     
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I don't know of any reason why a trustee cannot be a beneficiary of a discretionary trust.

    But the question you should be asking is:
    'is this a good idea? and what are the possible consequences'
     
  7. Daniel Taborsky

    Daniel Taborsky Well-Known Member Premium Member

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    This is a good point. You wouldn't want to distribute any discountable capital gains to ABC Pty Ltd as you would lose the discount.
    Agree - it's only an issue where the trustee is the only person who can benefit from the trust. The reason for this is that you cannot hold property on trust for yourself. If there is more than one beneficiary (one which is the trustee) then this isn't a problem as the trustee is holding the property on trust for itself and others.
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Watch out for the stamp duty effects in some states such as nsw. Changing trusteea could result in ad valorem dury being charged if the trustee is a beneficiary as changing trustees can result in changing beneficiaries
     
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  9. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Dan and Terry raise very valid points which indicate why competent advice is needed. Trust merger and legal issues can arise. Two trusts with same corporate trustee is another error made by some....Property Trust leases to business (Disc Trust). Problem is a company cant contract with itself and so major issues with property rental income / deductions occur.
     
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  10. Freester

    Freester New Member

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    The whole purpose of this structure is to preserve 'working capital' and limit its erosion by taxation through distributions to individuals on high marginal rates.

    The proposed company ABC Pty Ltd will be a legitimate trading company earning profit and paying tax and not merely a 'Bucket Company.'

    I think that some replies to my initial post have missed the point or not read it carefully.
     
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Best to seek specific advice in that case.

    I only skimmed you post as not easy to read with the company names etc and would need to draw a diagram to map it out.

    What do you think the asset protection issues could be with a trading company receiving trust income?
     
  12. Freester

    Freester New Member

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  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Nice diagram. What software did you used to draw this?
     
  14. Freester

    Freester New Member

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    Terry, I know the advice you would give; that would be to create a new trust and a new corporate trustee which owns ABC Pty Ltd.

    I know most accountants will advise, as they always do, to create more entities; another trust, another company and another trustee company and further add complexity. This unnecessary complexity is great for accountants, more entities = more fees!

    Asset protection is the main reason they give to justify the complex entity structure they promote.
    The protection that creating further entities provides is negated by their complexity and administrative cost.

    The possibility of a law suit arising from my business dealings, for whatever reason, is an extremely unlikely event (as probable as a jumbo jet falling on you). In my 25 years in business, I've never even encountered an inkling of any such action against myself or my businesses. My exposure to such threats is minimal as I choose very carefully with whom I deal with.
     
  15. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Asset Protection is only one aspect. What about the estate planning aspects? Who controls what entity and what are the consequences on death and incapacity of that person?

    BTW, that wouldn't be my advice
     
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