Legal Tip 151: Structuring the Ownership of Shares

The source test and the control test - s 1227 Social Security Act
Very complex stuff. but they could lose their pension altogether even if never receive any benefit from the trust.

 

depends how the trust is structured - but possible under a notional estate order.

 

Here is my attempt at a diagram

 

The franking credits make the distribution a franked distribution. You cant pass franking credits and a proportionate distribution approach occurs. While you may infer that this is permitted by the terms of the trust deed tax law may otherwise prevail. Its a danger of reading too much into terms of a trust deed. eg Deed says that the trust can stream. Does mean it should or prescribe the method and limits !!

Attempts to bypass (franking trading ?) and over / under frank are a concern and mean the franking credits could be cancelled. This can sometimes be something applicable when a trust has a non-resident beneficiary. Since non-res cant use franking credits question gets asked - Can we distribute no tax credits to a non-resident. Answer is generally no. However, it may be possible to stream say a CGT amount esp if the shares are Australian.

The resolution to distribute may also be seen as incorrect and defective. In that case the trustee may be assessed on the tax at the top marginal tax rate as well.

 

I posted this same opening post over on invested, or investchat, and have answered a number of questions on that forum, which may be of interest, at
Structuring the Ownership of Shares

(I won't be duplicating posts anymore!)

 

Hi Terry, many thanks for a most useful post. I read this entire thread both on this forum and on Investchat. One question occurred to me (and sorry if it has already been answered). Can a trust owning shares distribute (as an example) income and capital gains differently amongs beneficiaries. Let’s say the underlying shares in the trust have a net loss (they are negatively geared) throughout the year. Invariably, you would distribute this net income loss to the beneficiary with the highest marginal tax rate (provides the biggest tax deduction). And what if the trust also sold some shares throughout the year for a capital gain. Could you distribute this capital gain to different beneficiaries who have the lowest marginal tax rate. Assume for the purpose of the example, that the net loss and capital gain occurs in the one financial year. And what about slicing and dicing in other ways. Trustee distributes dividends from some shares to one beneficiary, and dividends from other shares to a different beneficiary, taking account different franking rates (some beneficiaries (eg OS ones) could not use franking credits, so best not to distribute dividends with high franking rates to them). Another example would be where the trust sells different types of shares, some have capital gains, some have capital losses, so you distribute the gains to some beneficiaries and the losses to other benenficiaries. Is this general slicing and dicing possible by the trustee? Thanks again for a terrific post, and sorry if this question has already been dealt with.

 

Yes a trust can distribute capital gains to a different beneficiary to income, but only if the deed allows it.

However losses cannot be distributed.

 

Thanks Terry. So, do losses just accumulate and get offset against gains in the trust (net gain is then distributed). Or are capital losses lost simply ‘lost’ each year if not offset against some gains in that year (I.e don’t carry forward). In which case, need to time sale of shares with losses with sale of shares with gains in the one financial year.

 

And on my other question, can I come from different shares in the trust be distributed to different beneficiaries (assuming trust deed allows).

 

Typo. Meant to say ‘income from different shares...

 

Yes income losses and capital losses can be carried forward. certain rules apply.

 

Yes income can go to different people, including share income, as long as the person is a beneficiary.

 

Regarding margin lending, I assume if you have an existing margin loan in your own name secured against shares in your own name, and you wish to have the shares now held in trust (effectively transfer the shares to the trust with you as trustee) that is a whole new margin loan application.

 

If you maintain LVR I think you may be able to draw cash and onlend to a trustee.

You could use the margin loan directly because the contracts will be with the individual in their own right and not as trustee.

Also title to the shares is held by the lender.

 

I thought that as long as a trust resolution to distribute was done on or prior to 30th June then a discretionary trust could distribute those funds at any time within a reasonable time frame but it didn't need to be distributed before lodging the tax return for that financial year. What happens if the tax return is first lodged then the distribution to the beneficiaries bank account is done after this?

Open class beneficiaries - I've seen this mentioned in this thread before but what does it mean? Are no beneficiaries listed as named beneficiaries in the trust deed?

 

Legal Tip 101: Open v Closed Class Discretionary Trusts Legal Tip 101: Open v Closed Class Discretionary Trusts

 

A distribution v loan v unpaid present entitlement all needs to be addressed or the resolution is .....

Open classes still need definition ... a class disc trust is another option. Can be an alternative to a unit + 2 X disc trusts

 

@Terry_w
I am unsure if I need a trust. I have talked to my solicitor and accountant and they keep reiterating the benefits but I still feel that it is unnecessary, not 100% sure.

My trust (passed on by my father) has been set up with a company that has allowed me to set up a loan facility.

This has then allowed my partner and I to borrow money from the trust to buy a house but at the same time supposedly be able to protect assets in the event of a marriage breakdown or creditors etc. Because it is a loan facility set up, it acts like a commercial loan with which interest is accrued on the borrowed amount and this adds to my taxable income. We are both low income earners at the moment and I am not making repayments to the loan from the company setup within the trust. I find the accountancy cost quite high (even though it is probably reasonable) but also the added taxable income of the interest of the loan also chews away our savings.
I am worried that if I aim to get a job with a higher income that this makes my taxable income even higher. We have tried distributing 50% of the interest to my partner but this would impact her benefits (Centrelink) for 'her' three boys to be affected.
I can't get a straight answer from my lawyer or accountant on what to do - or what my options are. they have told me not to vest the trust - but I see it hindering the savings we are already making.
If I were to get a higher income job what could I do to lower these tax costs.
If a little money were left over in the trust, should I buy shares with this (personal or via the company within the trust)?

 

pdw sounds like you have a Testamentary trust but are using it in an ineffective manner. You are probably creating a tax liability for yourself when there should be none.

But I would suggest you not close the trust as these have great potential.

I suggest you get a second option from other lawyer.

 

@Terry_w how about the best process for Structuring the Ownership of Shares for Children

Ashley Ormond talks of a process in his Book How to Give Your Kids 1 Million Each! (And It Won't Cost You a Cent)

Is this the best structure?