Legal Tip 231: Why Accumulate Income in a Trust? Asset Protection!

Legal Tip 231: Why Accumulate Income in a Trust? Asset Protection!


Bart is a high flying skateboard executive on the top marginal tax rate. He has a trust set up which he controls. He is single and doesn’t want to cause the trust to distribute to anyone other than himself. It is 30 June at 11.59 when he realises as trustee he has no one to distribute the income of the trust to other than himself. He is at risk of bankruptcy potentially so he decides to keep the money in the trust and he causes the trust to reinvest it. By doing this the trustee will be taxed on the income at the top marginal tax rate, which is the same as what Bart would be paying anyway.

What would be the benefit of having the trust make him presently entitled to the income and either leaving it in the trust or distributing it to him and him gifting it back?


I guess there is at least one reason and that is asset protection.


If the money came out and went back in it would be a transfer. Transfers can be defeated under certain circumstances including transfers to defeat creditors and under market value transfers – gifts.

This applies even if Bart is made presently entitled to the income and doesn’t take it. It would then be an equitable chose in action, akin to a loan and available to creditors if Bart were to end up bankrupt.


But what Bart should have done was to acted earlier and set up a bucket company and had the trustee make the bucket company the recipient and paid the tax at 30%. This would have saved 17%.

 

Would bart get in trouble for being involved in a tax avoidance scheme or would he be considered to be tax planning effectively?

 

All taxpayer decisions can ultimately be considered as a Part IVA concern if it fulfills the tests. If all elements of a corporate distribution are met and no further Div 7A concerns occur it should not be a Part IVA issue.

The 30% tax rate is ultimately not the full and final tax. At some time Bart may want to draw the $$$ out of the bucket company. That would then be a franked dividend and further tax may be applicable.

 

Who should own the shares in Charlie Bucket Pty Ltd?

 

Depends. Could be an individual or trustee. See my other tips on this