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Legal Tip 151: Structuring the Ownership of Shares

Discussion in 'Legal Issues' started by Terry_w, 14th Dec, 2016.

  1. trinity168

    trinity168 Well-Known Member

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    @Terry_w - I like the story telling explanation much better :cool: Thanks.
     
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  2. mimosa

    mimosa Active Member

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    Thanks Terry, I'm still trying to wrap my head around this.

    In the story about the orphan you said:
    Did you mean to say "distribute to the company"? If not, how does it work distributing the income to the trust?

    If the income was distributed to the company and the orphan wanted to reinvest the income in some more shares, would the shares have to be purchased by the company ( and hence not be eligible for the 50% cgt discount) or could they still be purchased by the trust, perhaps by only paying out $1800 to the company (the amount required to settle the tax bill assuming no franking credits) and retainibg the rest in the trust?

    Or have I got this completely wrong? Many thanks.
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Sorry you are right Mimosa, that should read "to the company".

    If the trust distributes income to the company there are 2 choices
    a) company can buy shares
    b) company can not take the distribution but to leave it in the trust
    c) Company can lend money back to the trust

    Ideally you want the shares to be in the trust rather than the company as that gives more flexibility and saves some CGT when they are sold.

    But this is difficult because both b and c above will result in Division 7A issues. So a formal loan agreement would need to be in place with a certain minimum interest rate being charged about 5.45%pa

    Actually this interest rate may not matter too much as if the company lends the trust money and the trust buys shares the interest would be deductible to the trust. This is income to the company though, and since the entities are all related overall it may not make that much difference in income overall but may save tax with the CGT savings.

    I can feel another strategy taking shape.
     
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  4. KJB

    KJB Well-Known Member

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  5. I dont generally advocate a strategy to save tax using a bucket company as it is fraught with mistake and I could be blamed. There are many conditions. Very few people who adopt a bucket strategy comply - some dont care and see it as a formality. They notionally distribute income to a company to save $ tax but then personally borrow or dont pay the distribution etc. The concept of calling something a bucket company strategy is sign of a pending problem.

    My comment re limitations on adults was more specifically "no value if one adult"..ie no spouse, no kids etc. The benefits of a trust in such instances are less tax driven and more a legal / asset protection basis. Agree they may marry later etc have kids etc....Its a area for legal advice IMO and rather than initial tax issues the longer term asset planning issue needs consideration.
     
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  6. Not at all. I have clients who are still drawing fully franked dividends years after retirement. It was the SMSF to have before the days of SMSFs for some people. Death can ruin those plans and important to check that aspect.

    I would question if the $$$ is better invested within the super system v's a company.
     
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  7. mimosa

    mimosa Active Member

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    What happens when a discretionary trust has outlived its usefulness from a taxation point of view, eg if the sole beneficiaries (husband and wife) are both retired and hence in the same tax bracket? Can the assets be transfered to individuals and the trust wound up to save on accounting and compliance fees or would shares held in the trust have to be sold by the trust (incurring cgt) then repurchased by individuals and would property transfer incur stamp duty? Thanks
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes, it could be wound up but that would trigger a CGT event.

    Property would trigger stamp duty in most states too.
     
  9. To have franking credits there is always income. The issue is about net income. Who says deductions must be claimed? Tax law doesnt say deductions must be a deduction.

    Share issues for trusts can be affected by other issues too and a good tax person who knows trusts is critical....
    • 45 day rule and 5k cap
    • Trust loss rules
    • Family trust election
    • Streaming
    • Resolutions
    • Strategies re property and shares together as Terry said
    • Duty issues
    • Good cgt records...often overlooked
     
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  10. You didnt mention super. That may be a strategy to wash profits and address many concerns too.
     
  11. Stamp duty in many states can be ahem avoided. Its a basic concept that trusts can end and cgt triggers occur. But one legal concept allows a trustee and beneficiary to become a legal owner that is the one person. No duty. Legal advice is key and just like Gina had to seek special advice on the issue so should anyone else
     
  12. mimosa

    mimosa Active Member

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    I think all in all there is not a lot of value in a discretionary trust for me and my particular circumstances. Yes, there is the potential of some benefits in a handful of years, but not sure this is worth the extra complication. Especially at my stage of the investment journey I put a huge premium on simplicity over extracting every last cent.

    I may yet seek some proper legal advice, but thank you very much for all the info here, its been a huge help in working through the process.
     
  13. austing

    austing Well-Known Member

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    Stating the obvious here but for most Super can't be accessed until 60. An investment company in some circumstances could still be useful for those intending to retire early.
     
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  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    And don't forget where you know that you will have access to a lump sum or income in x years you may use up capital you hold outside of super to allow you to 'retire' early.
     
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