Structuring the Ownership of Shares

Trying to protect a portfolio of publicly listed shares from any business disputes / litigation (in unit trust 1) or any tenant litigation / other potential danger (in unit trust 2).

So is it smarter to establish a brand new disc trust with a brand new corporate trustee solely for the purpose of acquiring and holding said shares long term? Plus a new bucket company = 3 new entities to add to the mix.

Or is it safe to use any of the discretionary trusts holding units in unit trust 1 and unit trust 2. As they are only unitholders and operate no business of their own. But yes they are guarantors on some loans as some banks require this. These loans are secured by real estate held with the unit trust 2

 

After I typed all that I am thinking a fresh new set up might be best.

But would love to hear arguments that support the opposite view, if any.

 

best to seek specific legal advice. You might not need a corporate trustee even

 

Q1: Is it easy to move everything owned under individual names into trust?

Q2:Will debt recycling benefit will be reliased under Trust/Company structure?

Read few of these posts but not sure as can't understand somethings hence askibg the above to find out if its worth before approaching to seek advice formally.

 

1 yes
2. Yes I have a tip written on this

 

Over time my views on structuring the ownership of shares are changing. A trust could still be good for large amounts, but a company can be worth considering, where the shares of the company are held by a discretionary trust. This is because of the reduced administrative hassle involved and the ability for a company to retain income.

 

The biggest downside to the company owner is that of CGT. Gains dont get a discount but do get a lesser tax rates.

Lets compare a top marginal rate taxpayer. eg CGT as individuals is 50% of the gain x 47% = 23.5%. Where the company may likely be 100% x 30% = 30% tax rate. For every $10,000 of total gain this equates to a "cost" of $650. For share trading however there will be a tax benefit execpt individuals cant assume that is always the case. Some individuals can use trading losses and some cannot as they must be deferred. There may be merits to "passive" investments held for gains in a trust with human truistee/s so that the gain can be distributed even to tax free parties eg uni kids, wife not working etc

This cost differential will increase for lesser tax rate individuals. eg Stan's marginal tax rate is 39%. The tax differential is now 11% or $1,100 per $10,000

A further limit is where the individual has CGT losses. A company cant pass-through the gains. A trust can. Hence the tax rate via the trust could be 0%. A company merely reports "trust income" and each element loses its charecter.

But then some trusts come with issues. Has the trust made a family trust election and Interposed entity election ? I have seen two this week that didnt and they had used losses and franking credits ...which they should not have. It was DIY investor who didnt know what I meant. So advice and support is a further hidden costs for trusts too. Companies are somewhat simpler.

 

24.5% I think. 45% x 50% and the medicare on top. Assuming no HECS

Don't forget a company's tax rate is not the final tax as the shareholder is taxed, or credited, once a dividend is paid. In theory a shareholder could get back a full credit for all the CGT that a company has made.

Where the company won't be selling for many years CGT is also less of an issue.

 

and i should point out that it doesn't have to be the one structure for everything. Multiple structures are necessary when you start building wealth.

Perhaps this one should be a separate thread in itself.

 

If franking credits were removed in Aus, would that make the company only structure less desirable?
Would you not then be taxed as dividends are paid to the company from the shares, and then taxed again as you require the income from your company?

 

It could be

 

A good example is

A the company that invests and has a trust as shareholder.
OR
B a trust that invests and a company (and ibdividuals) as beneficiaries

A cant deal with CGT amounts or stream. There is no CGT discount. Franking credits are non-refundable.
B Can stream, pass through and choose beneficiaries for each element of income incl CGT amounts. Beneficiaries can get refund of franking. Company beneficiary can also frank and defer dealing with net income.

Land tax issues and so much more.
Asset protection, succession, control and much more

 

would there be a situation where a company that only invests in shares that this would be an issue?

 

I sometimes encounter it. A trust can distribute / stream franked income to individuals. Or even CGT amounts. The company cant and at worst the company may have a $0 tax bill but loses the franking credit. In some cases its also possible if franking balances allow to pay a dividend to the shareholders to act to pass it through so the shareholders still get the refund assuming they can benefit from franking. Adds a little extra complexity, cost.

Another more rare case concerns small business income. Lets say a trust trades it may generate small busienss income. The offset must be propertionate to beneficiaries. A company beneciary could have one of two outcomes. If 80%+ of its income is small busienss it may be a base rate entity (26%) vs one that doesnt meet that test For a company that does meet the base rate issue it may then receive more franking than its needs. But again it can accumulate frankinga nd pass that through to shareholders by paying a dividend.

 

for a company franking credits being non-refundable is only an issue if there is negative income.

If a company receives income of $70 wit $30 in franking credits (from fully franked dividends) its taxable income would be $100 with $30 in tax payable. If it was conducting a business this could be an issue if the taxable income was low or negative but if all a company did was invest in shares (such as a bucket company receiving income and then reinvesting that into shares) I can't see how this could be an issue.

 

Hi Terry

When shares owned by individuals are transferred to a trust, will that trigger CGT?
Thanks!

 

yes

 

With shares (or property) owned by Trust with Corporate Trustee can ownership be transferred to a beneficiary? Will CGT be triggered?

 

Yes. it will depend on the circumstances but if a discretionary trust then it would trigger CGT (if the value exceeds the costbase)

 

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