Legal Tip 151: Structuring the Ownership of Shares

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

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  1. mimosa

    mimosa Well-Known Member

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    Let's assume a trust has net income every year. If the trust deed is set up correctly, can the trust distribute dividend income to one beneficiary (bucket company or person A) and the franking credits that relate to those dividends to a different beneficiary (person B)? Or do franking credits and the dividends they relate to have to be distributed as a set?

    If I wanted to set up a discretionary trust (or at least seek further advice) where would I start? Lawyer or tax accountant? Currently I have neither.
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    In theory it could be distirbuted to differnt people. But I have never done this.

    You should see a lawyer to set up a trust. If you use a non-lawyer they will use a standard template drafted by a lawyer. The lawyer can also advise on who should take what roles and the issues. The tax agent can advise on the tax aspects (commonweath tax).
     
  3. R-Hub

    R-Hub Well-Known Member

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    Nice work Terry, been reading through a lot of your posts. Question, with the costs associated with a DT with a company as trustee (setup and on going), what income do you think a trust needs to generate before it becomes viable.

    Thanks again for your time.
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    it depends. It could also be running at a loss and be viable.
     
  5. R-Hub

    R-Hub Well-Known Member

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    Thanks Terry for the reply.
    In a situation with my partner not working for another 3-4 years (raising the children to school age) and just part time/ maybe a business option after that. Two IP's with LVR's of 30 and 40% and PPOR not mortgaged. Got cash in both our names. Want to borrow to invest (non property) and take advantage of her lower marginal tax rate with the flexibility that a trust allows. Also to distribute income to children (be it small amounts) as the years go by. With the borrowing interest offset to personal income.
    Would you see any issues or short comes with this strategy. Your opinion would be greatly appreciated.
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    What strategy are you referring to?
     
  7. Clemens

    Clemens Member

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    Following the discussion in this post I am thinking a step further:

    An investor may have different trustee companies, where the shares of these are held in a seperate DT with an individual trustee. But he might also want to benefit from the share market (trading different asstes).

    1. Is it better to keep the publicly traded shares seperated from the shares of the trustee companies in DT and set up a new DT with an individual trustee?
    2. Does this affect the asset protection if the trust (which holds the shares of the different trustee companies and the publicly traded shares) lends money (as a registered loan) to a investment trustee company (the shares of this company trustee a held by the individual trustee of the DT) to invest in IP?
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    1. It depends.
    2. Yes
     
  9. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Franking credit farming schemes have anti-avoidance rules. It can depend on the value of franking credits and whether its a dividend strip in breach of franking trading rules.

    Trusts determine net income by adding dividend income + franking credits etc .So trust income grosses up cash income for the value of the tax credits. Distributions are franked rather than passing on franking credits.

    Franked div / unfranked can be distributed to different beneficicaries if the trust deed and resolution to distribute both address this. But to strip franking credits means the franking credits are lost. So potentially double taxation I guess......Or the trustee gets taxed at top marginal rate ?
     
  10. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Why not Trust A distributes to Trust B if it works. Or B to A.
    That way profit can offset loss...? Maybe.

    I know of people with DTs that are specifically CGT account or revenue account.
     
  11. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Trust investments lose value ? Then you have a CGT loss trapped in the trust. If the income issue is so assured perhaps easier and cheaper in her name ?

    Distributions to minors is far harder than it sounds when you have ETFs, trust and other distributions - The tax work can cost more than the amount distributed.
     
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  12. Chris Au

    Chris Au Well-Known Member

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    Another great discussion about structures for owning assets.

    Honing in on the points made in the OP - asset protection against creditors of the beneficiary, and tax savings.


    Say my partner and I are the two beneficiaries from shares bought under the trust (no children - now or into the future), I am the director of the trust, and my partner and I own RE in personal names.
    A tenant falls in an IP and claims that they can not work for the rest of their working days due to injuries sustained from the fall, thus suing us for damages, claiming that repairs weren't undertaken.

    First question - we have Landlord insurance - would this take care of this matter (from a financial perspective)?

    Second question - If our assets were called upon through the above example, wouldn't the shares held under trust be also called upon due to me, as Director of the trust, also owning the IPs under personal name?

    Long story short, I'm wondering if as both Director of the discretionary trust, and owner of the IPs, the assets owned under trust are exposed to events involving assets held under my personal name (ie not giving the shares the asset protection a disc. trust structure could give).
    _________________________________

    On the tax side, if we were to distribute tax unequally between the beneficiaries, would we advise my accountant how we want the income distributed, or (I assume) the accountant might determine how the income is best distributed between the beneficiaries to optimise tax? (a qstn for my accountant I'm thinking?!)

    As many are, I'm balancing the ongoing cost of managing the trust (was advised - ~$1,200 pa account fees vs. $0pa additional cost for shares held in personal name), with the asset protection and tax aspects of holding long-term shares in trust.


    (oh, and unless both beneficiaries were to die in a catastrophic accident, I would sell up the shares in our old age so there were no trust issues for the executors of our wills to deal with...)
     
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  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Hi Mac


    1.
    Landlords insurance is the first defence, but this would only cover you for somethings such as accidents. It won’t cover contractual disputes and it won’t cover accidents where the landlord has been grossly negligent. E.g. knowing about a repair and not fixing it and this causing damage to the tenant. Illegal work – especially electrical, even if you don’t know about it.


    2. If the landlord is sued they may have to pay a the tenant or whoever is suing them money. If they don’t have the money to do this they will need to sell other assets to raise it, if they can’t they could be bankrupted.


    If a person is bankrupt their ‘property’ immediately passes to a trustee in bankruptcy who will then take control and sell it.


    With the trust you are not directors of the trust but directors of the company which is trustee. This company would be the landlord. The company would be sued by a tenant using the owner. Companies offer limited liability. That means the shareholders and directors are not personally liable for its debts – with many exceptions. Because the company is acting as trustee it won’t have any assets other than the $2 sharecapital but because it is trustee all assets it owns as trustee will be exposed and can be used to satisfy any debt.


    With a discretionary trust that is open class with no default beneficiaries all the beneficiaries are what are called discretionary objects. None has any interest in the property of the trust or the trust itself, other than being considered by the trustee. So this is not something a trustee in bankruptcy can take. The bankruptcy trustee will become the bankrupt so they are potential beneficiaries but the trustee of the trust will simply not distribute to them.


    On the tax side it is the trustee who decides where to distribute the income and capital, subject to the trust deed. What the trustee may do is to seek advice before June on where best to distribute the money so as to minimse tax.


    $1200 pa for a trust that only owns shares would be on the high side I think, but I am not an accountant so get some quotes.
     
  14. S0805

    S0805 Well-Known Member

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    thanks @Terry_w and all for the information. quite informative. can i pls run pass this scenario to see it seems feasible from setup point of view...

    We currently hold 65k (funded from savings) worth ASX portfolio in lower earning spouse's name. Plan is to add other 40k (from savings) to the portfolio so in total 105k in shares.
    apart from 3-4 year (when starting family), spouse will most likely be working & in 34.5% tax bracket. we are in unique situation where we will have 2 adults tax free thresholds (18.2k each) will be available for us to utilise if we like. these will be our parents, reading these forums got me thinking family trust may be better way to go rather than current plan. Here's what we are thinking...

    1) Setup family trust as myself being trustee & five beneficiaries (myself, spouse, parent1, parent2, bucket company)...Do we have to setup bucket company on starting a trust or we can add that as beneficiary later on when required? I am not if that affects the running costs?

    2) liquidate current 65k from wife's name and transfer in to Trust name. Pay CGT. And Gift 40k to trust and have it invested in Trust name....this gifting does it need to documented or something?

    3) divert all income distribution + franking from this 105k portfolio equally among parents....Is this as simple as telling accountant that transfer money to parents and how can they get refund on franking credits?

    4) On passing of parents, divert all income distribution to bucket company and use that as compounder until ready to distribute income. Once kid/s reach to adult age. divert all income distribution to them from company.

    5) when reaching near preservation age, subject to rules then.... pass assets from trust to super leaving enough outside to suffice tax free threshold..

    I think trusts are eligible for 50% CGT discount but what about can it carry forward losses?

    If parents becomes the beneficiaries of trust do they have to document something in their Will to be sure...I thought as I am the trustee and its my discretion to add/remove beneficiaries as well as allocating income distribution.

    I understand debt recycling strategies can be used to turbo charge above but yet to get my head around it...Negative gearing is other topic need more reading..

    cheers
     
  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    1. Depends on the wording of the deed. Just make sure the trust is drafted to allow this when set up.

    2. Gifts should be documented with a deed to demonstrate intention. Otherwise disputes can arise in the future

    3. Nothng to do with the accountant. The trustee must decide on their own who to distribute income of the trust too. Letting someone else do this would be a breach of trustee duties. Tax agents could give scenarios about how much tax could be saved by distributing certain ways.

    4. Yes – what if you die first?

    5. Prohibited under the SIS Act. You might have to make personal contributions to super.

    6. Trusts can carry forward losses, family trust election may be needed.

    7. Being a beneficiary is not something that can be passed in a will

    8. Consider the social security act issues if parents could potentially get benefits.

    I have written an article on debt recycling and trusts. Have a read of that.
     
    Perthguy likes this.
  16. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    1. Depends on the wording of the deed. Just make sure the trust is drafted to allow this when set up.

    2. Gifts should be documented with a deed to demonstrate intention. Otherwise disputes can arise in the future

    3. Nothng to do with the accountant. The trustee must decide on their own who to distribute income of the trust too. Letting someone else do this would be a breach of trustee duties. Tax agents could give scenarios about how much tax could be saved by distributing certain ways.

    4. Yes – what if you die first?

    5. Prohibited under the SIS Act. You might have to make personal contributions to super.

    6. Trusts can carry forward losses, family trust election may be needed.

    7. Being a beneficiary is not something that can be passed in a will

    8. Consider the social security act issues if parents could potentially get benefits.

    I have written an article on debt recycling and trusts. Have a read of that.
     
    barduck likes this.
  17. S0805

    S0805 Well-Known Member

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    thanks @Terry_w. Are you referring to the face that income distributed to parents will affect their income threshold for their social security payments....
     
  18. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    no
     
  19. S0805

    S0805 Well-Known Member

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    How does this compounding principal works in practice, see if you have 10 years to compound income, where annual income is 5k (from shares) and franking credit 3k (which negates the tax paid by company) annually. does that mean you will have 50k sitting in this bucket company after 10 yrs. Out of this 50k you can gradually distribute the 20k each year to beneficiaries until they run out. plus you also get franking credits back from ato which bucket company paid during those compounding years......is that correct?

    Also, as government changed company tax to 28.5% does that apply to bucket company
     
  20. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Basically yes.
    Bucket companies taxed at 30%. The lower rate is for small business companies. Perhaps set up a low risk business....
     
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  21. S0805

    S0805 Well-Known Member

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    what does this refer to than @Terry_w. some sort of obligation to payments or something. I

    am thinking if I put parents as beneficiary in trust structure on their passing does any of my siblings can claim something in trust or something?
     

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