Tax Tip 324: Some Major Tax Differences Between a Trust and a Company

There are a number of differences between companies and trust. I have made a list of 3 of the major differences in the tax area below:


a) Income changing character

When a company makes money and pays this money out the character of the income changes. It may make a capital gain, but when it pays a dividend to shareholders that income is not characterised as a capital gain.


Trust income can retain its character though. If the trust makes a capital gain or receives dividends that income would come out as a capital gain.


b) 50% CGT Discount

Companies are not entitled to get a discount on any capital gains they make.

Trusts on the other hand can get the discount and this can be passed onto beneficiaries where the beneficiary is a person.


c) Retention of Income

Companies can retain income, pay tax on that income, and distribute the income to shareholders in a different financial year. This can be good for saving tax as the income could be distributed to the shareholder in a year in which they have a low income – and they can get a credit for the tax paid by the company, and even can get tax refunds.


Trusts on the other hand need to distribute income in the year it is received as if they don’t the trustee will be taxed at the top marginal tax rate with no credit given to beneficiaries if they were to receive the income in a later year.


There are many more differences, but this is just a taste of some of the things to consider when considering a ‘structure’.

Now over to Paul!

 

As a non tax resident, we are not entitled to the 50% CGT gain, am I correct?

 

Generally not, but that will depend on the circumstances.

 

What's the general run of the mill fee for setting up a trust or company for a couple saving and wanting to invest around 60 to 80k a year into index funds??? Very broad question but got a quote or 2 and paying 3k for set up and 7k for yearly admin seems abit rich to me!!!!

 

from $1100 to $5k or so. You should only set up trusts and companies through solicitors as legal advice is needed. Yearly admin is what an accountant could do - prob from $300 upwards.

 

What about setting up a unit trust to earn the land tax threshold, would this benefit outweighs others, as that’s my broker did many many yrs ago?

 

Lose the ability to stream income.

The other question is, if you are non resident, how does land tax work with a unit trust if the unit holders are non-resident?

 

A broker set up a unit trust?

Not sure what you are asking.

 

What structures did the quote involve? 2-3k set up isn't crazy, especially if it comes with legal advice. Though the 7k yearly admin fee looks very high. Typo?

 

the yearly fee could have been for accounting and tax returns for a trust running a complex business.

 

Companies have a franking account and accumulate these franking credits and can defer the decision to pay dividends indefinately. Trusts can pass-through franking OR utilise the credits themselves in some cases. A trust may be obliged to distribute income or pay the top marginal tax rate each year. Both can defer losses.

A company must remunerate employees or Directors. It can also pay profits to shareholder. A trust on the other hand may need to employ people to pay wages. Instead it may distribute profits annually.

Strangely, companies can pay dividends as infrequently or frequently as they wish. "Family" Trusts (in almost all cases I have seen) may be limited to making a distribution annually. Many deeds fail to allow interim and then final distributions. Strange. A well drafted deed should permit distributions at any time during the year with a final distribution determined.

Companies pay a dividend at a point in time and it is often taxed on receipt (or when credited). Trusts however may declare a person entitled to annual income and pay it long after the year has ended and it is taxed despite non-receipt.

Companies can have various classes of shareholders. Trusts usually have one or limited classes of beneficiaries defined by deed and other complex (tax) laws.

Trust tax loss utilisation rules are far more complex than a company.

Trusts are easier to "wind up" than a company if all agree. A company is easier to windup and avoid legal issues if they dont.

Companies can provide a fixed % entitlement to shareholders. A unit trust can also do this. A discretionary trust CANNOT and all beneficicaries are "mere objects" and unless made entitled may be unable to seek or enforce an entitlement.

A company shareholder cannot demand a dividend. Indeed they may find the dividend will be paid when it is least desired.

A company shareholder may find suing the company difficult.

Both are complex arrangements and involve legal concepts. Get any wrong and civil, criminal or statutory offences can be committed.
I doubt few people who setup a company have ever read or considered the Corporations Act and could explain key concepts. Likewise I will argue few people who are a trustee have ever read the deed for their family trust.