(Too?) Basic trust question

Hi all

I feel like I should know this but I don’t do any clarification would be awesome.

A business is run through a discretionary trust, and makes a profit of $250k for eg.

Person A works full time in the biz but their partner B works PAYG, earning significantly less than the biz profit. Person A does not get paid as payg through the biz, just takes director loans and sorts it out at tax time.

Can they distribute to the payg partner B to lower person A tax or are their issues with that bc B doesn’t work in the biz?

I always thought it was fine but a recent conversation made me wonder if I was wrong.

 

If it is proper income of he trust, the deed allows it, and the resolution is done properly and on time it should be fine.

If the trust is generating personal services income their may be a problem.

 

IF they don't need the entirety of that profit to live on now then they can also make use of a bucket company.

Can also distribute to other trusts that my have losses from negatively geared property etc.

 

It depends what you mean by 'can they'. The trustee of they trust may have the power to distribute trust income to both or either person. This will depend on the terms of the trust.



Why would someone take director loans from a trust? How is that possible?

 

Just borrowing money from the trust I guess? A book entry more than anything. Director drawings? I don't know - maybe not a loan? Point is, they take cash from the trust during the year rather than doing the PAYG thing.

 

They trust is not a company so there can be no director loans. Trustee or a beneficiary might be able to borrow but since a trust can't retain income without top marginal tax rates being paid the income must be distributed. If this person isn't receiving any income from the trust then there are only 2 possibilities
1. Borrowing from the corpus
2. Taking income of the trust yet this income belongs to someone else.

1. Is unlikely
2. Is seriously problematic

 

I think what Terry is getting at is that a Trust doesn’t have a director.

I would like to assume that the individual is distributed income through the year as a beneficiary of the trust.
I don’t understand why the trust would lend the beneficiary funds through the year, then write them off? I see no benifit it this except a headache.

Being a trust 100% of the income must be distributed at year end. Where/how that is distributed is up to the trustee, and is subject to the terms of the trust.

Blacky

 

If registered with workers comp as well may be issues as they will consider some component of that distribution to be wages for workers comp declarations and calculations

 

The start point to the issue concerns the nature of the trust income.

If the income is Personal Services Income the trust structure may be a total and complete waste of time and money. The net p[rofit of the trust after allowing eligible deductions under PSI rules may be the income of the person performing the work and incapable of distribution by terms of the trust. Tax advice would be the best start point BEFORE tax planning.

Alienation of personal services income remains a concern. Using a trust doesnt make it legal.

IF the trust is capable of distributing income to beneficiaries instead then planning who should benefit and how to clear funds borrowed by one of other persons should also obtain advice. A distribution should have been made by resolution before 30 June 2017 for it to be effective or the trustee could also be assessed at the top marginal tax rate.

As mike says all this may also affect workers comp. And if its PSI its possible it wont !! The person doing the work can even be uninsured. And just because a trust pays a distribution of say $200K to a person doesnt mean its all wages either. I'm assuming the trust has a w/comp policy. It is likely to be required to have one.

 

And in year 2 the ATO will catch up and impose PAYG Instalments on the beneficiary. Perhaps if its wages then SGC and also PAYG withholding need to be considered too.

 

And don't forget the asset protection risks surround under-remuneration

 

and just to make it all fun the PSI rules change for commission agents

section 85-30 of the ITAA 1997 provides an exception for personal services businesses.a taxpayer will qualify as a personal services business under section 87-15 of the ITAA 1997 if one of the following applies:

1. you meet the results test, or

2. less than 80 per cent of your personal services income in an income year comes from each client and you meet one of the other three personal services business tests, namely, the unrelated clients test, employment test or business premises test, or

3. you obtain a determination from the ATO confirming that you are a personal services business.

Section 87-40 of the ITAA 1997 modifies the operation of Part 2-42 for certain agents. Section 87-40 will apply to you if:

(a) you are an agent of the principal but not an employee

(b) you receive income from your principal for services provided to customers on the principal's behalf

(c) at least 75 per cent of that income is performance-based commissions or fees

(d) you actively seek other customers to whom you could provide services on the principal’s behalf, and

(e) you do not provide any services to the customers, on the principal’s behalf, using premises that the principal (or their associate), owns or has a leasehold interest in, unless you use the premises under an arrangement entered into at arm’s length.

You will be taken to be conducting a personal services business under section 87-15 of the ITAA 1997 if you:

(i) meet the unrelated clients test (section 87-20 of the ITAA 1997), and

(ii) none of the clients provide 80% or more of the personal services income (subsection 87-15(3) of the ITAA 1997).

For the purposes of the 80% rule in subsection 87-15(3) of the ITAA 1997 - provided you are an agent covered by section 87-40 of the ITAA 1997 – your income will be treated as if were the personal services income from the clients and not your principal

 

There is nothing wrong with a trust lending to beneficiaries (if the trust deed allows it). It happens all the time.

Ordinarily, the trustee would resolve to distribute the income of the trust at 30 June. If loans have been made to beneficiary A during the year totaling $100 and beneficiary A receives a distribution of trust income of $100, the two can be offset.

If the $100 loan was made to beneficiary A and the trustee resolves to distribute the $100 income to beneficiary B, then an unpaid present entitlement (UPE) will be created for B's benefit if the trust does not have the actual funds to pay beneficiary B. UPEs can sometimes create issues but not always. For example, if beneficiary B was a company, you would need to consider Division 7A.

 

@Ross Forrester is mortgage broker commissions considered PSI?

 

Depends

 

@Colin Rice see above i just discussed that very issue

 

I reckon laymans terms might help us mere mortals

 

Haha that was the laymans version

 

Seriously though for mortgage brokers or sales agents on commissions who operate on their own account they can generally meet a lot of the personal services income test.

The big issue is for brokers or agents who work out of a licensee office. Many of them may find themselves caught as PSI

ATO has a good summary and note one must meet ALL of these tests

Commission agents

This is the one i have seen two financial planners caught under in an audit for which i came in to assist

unless you enter into an arm's-lengtharrangement, you don't provide any services to clients on the principal's behalf if you're using premises:

• owned by the principal (or their associate), or
• in which the principal (or their associate) has a leasehold interest.

BUT even when you meet this test you still need to pass one of the other PSI tests. If you dont meet the unrelated clients test, employment test or business premises test you have PSI

 

As long as they have made relevant family trust elections