Retained Earnings in a trading company held in trust under the trustee company

Hi All, tried looking for the answer before posting (apologies if this has already been asked) - generally speaking a trust needs to distribute all its profits to its beneficiary each year. If it doesn't it gets hit with penalty taxation rates. My question is - If I create the Corporate Trustee and a Trust then I also create a separate trading company (X) of which the Corporate trustee owns 100% of the shares under trust, does that mean if trading company X makes a profit but decides not to distribute any dividends - will it be able to retain it's profits and re-invest it back into the company at no penalty tax rates? Thanks in advance

 

You and the various companies will need to consider s100A ITAA36, Div7A ITAA36 and general trust law.

 

If the company pays a dividend it would pay the trust and then the trustee may need to consider how this is to be distributed. There is no obligation to pay a dividend, of course. However there are tax laws (refers to Terrys post) which would treat use of the company assets and money as a unfranked dividend if an associate uses the company profits. Many people start with the concept of accumulating funds in a company and then see this usused wealth and want to use it. They can, provided its done correctly. For example you could borrow from the company and use the funds to buy an IP. However the loan conditions in Division 7A must all be complied with eg unsecured / secured.

Tax advice would be prudent to avoid a far higher tax rate than expected. Company tax rates sometimes look appealing at 27.5% or 30% but this is not the full and final tax rate in all cases. Ultimately for the funds to depart the company someone will pay shortfall tax and the full & final rate may be higher than the top marginal tax arte.

 

I had a reread of the post, and if a trading company does not pay a dividend it will be just retaiing earnings and be taxed at that. but if you set things up wrong there could be tax on the top marginal tax rate if a dividend is paid.

 

Thanks Terry and Paul, very helpful comments indeed. In a bid to creating less admin overhead, what about if the corporate trustee also conducted other trading business? Would it be able to retain profits without paying a penalty tax rate? If so what would be a more prudent structure - having a separate trading company held on trust or trading under the corporate trustee?

 

Companies can retain profits. They would pay tax on those profits at 27.5% or 30% depending. It would not be wise for a trading company to hold assets or to act as trustee.
Get lawyer advice because setting any of this up.