Legal Tip 376: It’s Not One Ownership Structure but Multiple

The general idea people have when they come to me for ownership structuring advice, is that I will tell them about one structure which will suit their situation and that’s it. They can just hold assets in that structure going forward.

It’s not that simple though.

Take property for example. Some buying their first investment property in NSW may not want to use a discretionary trust because of the land tax issues, but someone buying in QLD may want to use a trust. But the second property in NSW might work in a trust, with the second property in QLD working better in a second trust. But a company might also work in NSW, or even a spouse’s name. If you want to get the asset into a testamentary discretionary trust then this would not be possible if it was held in a discretionary trust or a company.


Shares might work well in a discretionary trust, but they can also work well in a company. The company is much easier to set and forget with the dividends reinvested, whereas a trust will have to distribute its income each year and then that loaned or gifted back into the trust each year. The shares of the company could get into a testamentary discretionary trust so that the dividends could eventually pass to minor children at adult tax rates, but this is not possible with a discretionary trust held shares.

Some shares might pay low dividends so these could be owned by a highly taxed individual who could borrow to buy them and allow for negative gearing.

If you have 2 or more children multiple trusts can help segregate assets so that each child can receive control of one trust – if this is what you want.

Shares in a company could be easily passed to 3 separate testamentary discretionary trusts one for each of your 3 children, for example.

Someone might want to get the benefit of tax savings now with tax savings in the future too. So they might hold some shares in a discretionary trust and some in a company – perhaps a bucket company, with the shares of the bucket company structured for asset protection and so they end up in a Testamentary Discretionary Trust. You can the benefit of access to all dividends now or bucket company dividends after death – it might not be your death, but the death of a parent or grandparent even.


So don’t expect a magical trust that is set and forget and will hold all assets. Expect multiple structures concurrently and over your life time as you adapt for changing circumstances and your wealth grows.

 

This is a good post and something I'm thinking about lately.

In my case I have two different activities within the trust:
1. Long term ETFs and other long term investments, all of these are capable of having the 12 month CGT discount
2. Short term trading profits/losses (short term capital gains) as well as options income (covered calls etc). These cannot use the 12 month discount.

The trust has multiple beneficiaries, as well as a bucket company. In the ideal situation the trustee would like to:
1. Choose to Distribute ONLY the long term Capital gains to the individual natural person beneficiaries, to keep the long term discount 50% of CGT. (The persons marginal tax rates are at the maximum rate for all other income)
2. Choose to Distribute ONLY the short term capital gains and income to the bucket company, and pay the 30% company tax rate on these earnings

The problem I've encountered is that you can choose where to distribute capital gains as a whole, and you can choose where to distribute regular income (non capital gains) as a whole, but you can't choose which specific capital gains to distribute ie long term or short term to which beneficiary. From what I've read if you distribute capital gains, then the long term/short term ratio has to be pro rated at the same ratio as it was earned at.

Is this correct that a trustee cannot choose specific asset sales (the long term sales) to distribute, and that they can only distribute a percentage of total capital gains along with the split of long term to short term gains?

If it is true, then I may be better off moving the short term assets into the bucket company in order to keep the trust long term gains pure and not polluted with any short term gains. The bucket company may even become a trading business that can pay 25% instead of the passive income rate of 30%.

I hope this makes sense?
Can you please clarify the tax laws on flexibility of choosing capital gain distributions?

 

Yes that is possible. But the discount capital gains must be 'grossed up' so to speak so that the full capital gains goes to the beneficiaries that receive the income from the 50% CGT discount assets.

 

If the income is significant, wouldn't it be easier to use separate trusts for long term holdings and short term trading?

 

Thanks, looking at the trust deed it appears that would be grossed up per asset.
So if the trust sold one property with the 12 month CGT discount and had a capital gain of $50,000 it could distribute the $50,000 capital gain to the husband.
Then in the same year it also had a crypto capital gain from a 2 year hold of $50,000 it could distribute that separate capital gain to the wife.
Then again in the same year share sales with short term gain it could distribute each/all of these to the company.

Is this reading it correct that it is per asset like the trust deed says?

Or is the grossed up requirement an ATO rule that must be grossed up for the whole category of income?

Possibly a company may be better for the short term trading if it is able to get a flat 25% rate and doesn't benefit from income splitting that is already maxed out by the trust. To initiate the trading account in the company a very large capital loan would be made from the owners that could be gradually paid back before any dividends would ever need to be created, then the dividends could be paid in retirement along with any franking credits. At least this is what I'm considering as an option, though there's some nuances to which strategy is better or not..
To make it more fun some will open another trust to handle distribution of dividends between the married couple later.

 

Here is something from the ATO

Resolutions checklist