Legal Tip 151: Structuring the Ownership of Shares

Also trust assets cannot be put into testamentary trusts?

 

True but neither can company assets

 

Excuse my little peanut slowly ticking over..

The Trust would receive the $80k capital gain.
There would be a 50% CGT discount on the sale due to the shareholder being a Trust.
So the taxable portion would be $40k (does the other $40k get distributed tax free?)
In the instance presented the funds were distributed to two prison sitting individuals at $20k each.
In an alternative reality, if the $40k distributed to a bucket company does it work the same way in that the taxable rate is simply the 30% rate.
ie CGT liabilities have already been dealt with regardless of the beneficiary involved?

 

I should say, while in the north Korean prison those 2 remained tax residents of Australia.

The trust would get a 50% discount if the income came out to individuals - they would actually get the discount.
However, if the capital gains when to a bucket company it would not get the discount as it doesn't apply to companies.

 

Thanks Terry!

Bucket companies appear to be a great way to contain tax and portal it into a new financial year, though the CGT considerations probably needs some exciting spread sheeting to determine if valuable enough. Bucket companies also look to truly shine when it comes to retaining and accruing dividend payments and franking credits.

In your diagram, there's a share held by 'Trust B' in the bucket company.
Distributing to the bucket company and then paying the dividend to 'Trust B' would still result in the loss of CGT discount as per your previous response, as these are seperate actions?

Question related to Trust B though;
If Trust B only exists as a shareholder of the bucket company for occasional dividend distribution and tax time travel, does it require any particular annual maintenance? If it only received a dividend distribution say every 4th year, is there an issue with simply having a $10 bank account for the trust (with distributed funds funneling through) and lodging a RNN (return not necessary) for 3 out of 4 years (for both the bucket company & Trust B)? Or is it prudent to have some activity occurring within Trust B in each financial year? Assuming the Trust deed allows for it a bucket company could also simply be setup as a beneficiary at a later time (ie year 4)?

Also if the bucket company was to loan on commercial terms back to Trust A, is it the director/shareholder (trustee of trust shareholder)/beneficiary of trust shareholder that can create a div7A issue (if not dealt with right) or all of the above.
Also had a go at a diagram


If the 3 dormant 1 active year situation works for Trust B, and beneficiary 2 was to receive say $37,000 for 4 years of accrued dividends, which was their only income after being rehabilitated on their return from North Korea, it makes a significant deferred tax saving & credit

The real pudding is working out if the extra administrative load & expenses are marginal enough to the potential gains. On a long enough compounding timeline it presents compelling abilities though the extra sets of shoe-laces to tie up are a little vexing.

Apologies for the long thread, got a little excited as my comprehension has slowly increased and didn't get a very enthusiastic response when I tried to impart it to my partner at dinner last night.

 

If you were the trustee of a trust that held shares you might want to give capital gains to an individual and income to a bucket company. But this would depend on the circumstances and it could be better to give capital gains to a company for tax and asset protection reasons.

If a trust or company has no income it would need to pay asic fees and do nil tax returns still.

If a company lent an associated trust money it would need to be on div7A terms. An alternative might be for the company to invest itself.

I have written a lot of tips on bucket companies, some of the older ones are:

Legal Tip 93: Bucket Companies as Beneficiaries of Trusts Legal Tip 93: Bucket Companies as Beneficiaries of Trusts
Tax Tip 108: Using Bucket Companies to Save Tax Tax Tip 108: Using Bucket Companies to Save Tax
Tax Tip 111: Getting money out of a Bucket Company Tax Tip 111: Getting money out of a Bucket Company
Legal Tip 131: Estate Planning Implications of Bucket Companies Legal Tip 131: Legal Tip: Estate Planning Implications of Bucket Companies
Tax Tip 128: Capping your Tax Rate at 30% Tax Tip 128: Capping your Tax Rate at 30%
Legal Tip 136: How to Set Up a Bucket Company as Beneficiary of an Existing Discretionary Trust Legal Tip 136: How to Set Up a Bucket Company as Beneficiary of an Existing Discretionary Trust
Legal Tip 191: Testamentary Trusts and Bucket Companies Legal Tip 191: Testamentary Trusts and Bucket Companies
Legal Tip 195: Multiple Bucket Companies as an Estate Planning Strategy Legal Tip 195: Multiple Bucket Companies as an Estate Planning Strategy
Legal Tip 196: Strategy: Personally Owning the Shares of a Bucket Company Legal Tip 196: Strategy: Personally Owning the Shares of a Bucket Company
Tax Tip 200: Claiming Interest on a Loan from a Bucket Company Tax Tip 200: Claiming Interest on a Loan from a Bucket Company
Legal Tip 207: Bucket Companies and Death Legal Tip 207: Bucket Companies and Death
Legal Tip 217: Fixing a Bucket Company Structuring Mistake Legal Tip 217: Fixing a Bucket Company Structuring Mistake
Tax Tip 234: At What Point is a Bucket Company Worth it for Share Investors Tax Tip 234: At What Point is a Bucket Company Worth it for Share Investors?
Tax Tip 239: Bucket Companies and Diversion of Income to Adult Children with no tax payable Tax Tip 239: Bucket Companies and Diversion of Income to Adult Children with no tax payable
Tax Tip 253: Income Timing Strategies with Companies Tax Tip 253: Income Timing Strategies with Companies

 

Why does your bucket company have some shares owned by trust B and some by beneficiary 2?
If the bucket company pays a dividend it is forced to pay in propitiation to the shareholdings. If beneficiary 2 is a beneficiary of trust 2 you may be better off having trust b as the sole shareholder of the bucket company and dividends flowing back through trust A to beneficiary 2. I believe that will give you better flexibility when distributing income.

 

different classes of shares can mean dividends to some but not to other shareholders.
You want to be able to get the bucket company into a testamentary trust at death - ideally, while retaining flexibility during life

 

Ok, so by beneficiary 2 owning a class of shares in the bucket company she/he can get the bucket company into the testamentary trust at death?

 

Get the shares owned by the deceased into the TDT

 

Thanks that makes more sense!

 

These articles also relate to structuring the ownership of shares:

Legal Tip 269: 4 Reasons not to hold shares in the same Trust as Property Legal Tip 269: 4 Reasons not to hold shares in the same Trust as Property


Legal Tip 288: Structuring the Ownership of Shares in a Company Legal Tip 288: Structuring the Ownership of Shares in a Company

 

Hi Terry,


I emailed you this morning, just wondering if you have received it.


Cheers

 

This thread was a great read.

I have $3.8mil to invest.
It will likely be going all into shares/property trusts/credit funds (no direct property).
The capital will be invested slowly into shares over 12-18 months (DCA).
There is no lending involved.
I’m in my early 60s and retired.
I have three children; 1-2 may soon be non-residents, 1 pays > 30% tax.
The goal is to receive an income of $100k after tax and the rest to be reinvested for growth.
The plan will likely be to withdraw some dividends (for my income) and to reinvest any surplus.

I have spoken to both my lawyer and accountant. My lawyer does not feel I need a disc trust (“overcomplicating matters”, “unnecessary start up and running costs”) whereas my accountant does (due to tax savings further down the track).

I have the following questions:

1. If I set up a disc trust, my beneficiaries would be my children. Is this pointless in terms of streaming since 1-2 of them are likely to be non-residents in the near future?
2. When income is distributed to a beneficiary, do they actually receive that income? (for the moment I need the income coming to me and any extra is to be reinvested)
3. I read that a trust can have a company as a beneficiary, which would cap tax at 30%. What happens when income is distributed to a company? Can I access it?
4. If I have a company as a beneficiary, if my children decide to sell the shares in 20-30 years time, does that mean they will miss out on the 50% CGT discount?
5. I read that a trust can help with asset protection (ie. it can protect business owners from creditors). One of my children has their own business, but if the trust is in my name and they are only listed as a beneficiary, then can creditors still access the trust?
6. Trust assets don’t form part of my estate so does that mean I just need to add something extra to my will (I have testamentary trusts set up)?

Please use very simple language as I find this topic really difficult to comprehend.

 

1. No. It could be beneficial to stream to non-residents. It can also help avoid CGT K3 when you die if you don't own the shares.

2. They should. Otherwise it is a debt in equity

3. Research bucket companies. a Company is a separate legal entity with a whole host of issues, but it can be great for reinvesting and compounding and saving tax.

4. Sell which shares? Sells held by the trustee, the company or the shares in the company. Each are separate things and you should not be thinking you own the shares if they are held in a trust

5. A trust won't be in your name. If a beneficiary of a discretionary trust becomes bankrupt their only asset in relation to the trust is a chose in action being the right to be considered. If they are a discretionary beneficiary they have no interest in the trust or its assets.

6. Nope, because a trust is not part of your estate! If you die the trust keeps going. You need to work out how to pass control on.

It sounds like your lawyer might not have a good knowledge of trusts, or tax, or estate planning perhaps.

 

I have never heard of CGT K3. I will do some reading.

But I don't want them to receive it (yet). I need the income for myself now (the growth is for them in 20-30 yers time).

I will do some research.

Sell everything in the trust, so yes, shares held by the trustee.

Ok, that's good.

What do you mean "it keeps going"?. When I pass, I want my children to be able to split whatever's in the trust, equally. I have no interest in the trust providing for ten generations down the line. I want it to provide for my children (and their children).

 

If you control the trust you could give yourself the income, pay tax on it, and gift it or lend it back to the trustee to reinvest. Or you could divert it to a bucket company to invest.

if your kids control the trust they could cause the trustee to sell the shares and distribute the income and capital, potentially to themselves or other entities they control.

With a discretionary trust you might control it, but any control is temporary. if you die the trust keeps going but under new control.
If it is a discretionary trust you cannot be certain that it will be split evenly. There are no fixed entitlements with discretionary trusts. you need to consider this carefully as if one child controls the trust they could potentially distribute everything to themselves.

$3mil is serious money so you need to take legal advice, not from an accountant either, on how to get this money into the trust in the first place. This has serious asset protection and estate planning consequences.

 

Wow, this sounds really complicated. I will do some more reading.

What do you mean by "there are no fixed entitlements with a trust"? Does that mean that there's no way that I can be certain that it will be split evenly? Because if that's the case, I definitely do not want a trust.

Thanks, I may need to speak to another lawyer. My current lawyer knows that I hate anything complicated, that's likely why he has advised against a trust.

 

Unlike a company or a unit trust there are no 'shares' with a discretionary trust. The trustee can give all the income to any income beneficiary and all the corpus or capital to a capital beneficiary (which are usually the same - no distinction).

If you want certainty you would need either 2 discretionary trusts owning half the assets each or a unit trust with 50% of the units owned by 2 separate discretionary trusts.

 

See these

Legal Tip 199: 8 strategies for ‘passing on’ a discretionary trust to multiple people Legal Tip 199: 8 strategies for ‘passing on’ a discretionary trust to multiple people

Legal Tip 116: Multiple Trusts as an Estate Planning Strategy Legal Tip 116: Multiple Trusts as an Estate Planning Strategy

Legal Tip 148: The Biggest Issue with Discretionary Trusts Legal Tip 148: The Biggest Issue with Discretionary Trusts