Trust and company structure

Hi, I am rethinking the structure I use to hold properties and shares going forward. I have a pty ltd that I use to receive business income. Can I register a discretionary trust and make it shareholder in the company so I can channel some of the income to the trust? The trust can then buy property and reinvest the profit. It does not have to distribute income to pay tax.

How viable this structure is?

 

Owning property in anything related to a trading business is generally a no no

 

The company will not hold the properties. Trust will own them. Company is insured in case of liability etc.

 

If the trust pays distributes income to the company that then pays dividends to the same trust shareholder that distributes to the dividend back to the company you might breach section 100a

This is an avoidance mechanism to avoid division 7a loans and has been identified as a high risk area.

 

No. Trust does not distribute to the company. Trust receives the money from the company because it owns its shares and it then distributes to the family or invests / reinvests them.

 

Will you pay cgt on the sale of the shares to the trust? There is a market value substitution rule that deems sale at market value.

 

I can check that with my accountant. Happy to pay CGT if it is nominal. Or I can dissolve the existing company and create a new one

 

Sounds like you are confused Hash.

If the company owns shares the income can be retained. The trust can be the shareholder. so later dividends can be disributed to the beneficiaries later on with franking credits. But when the shares are sold there is no 50% CGT discount.

If the trust owns shares it will be hte trustee. Will this be the company or you? Either way the income has to be distributed otherwise the trust will be taxed at 45%. The trust may distribute to a company to retain the income and reinvest.

But tax is only one thing to consider, there are many other things on the legal side..

See
Legal Tip 151: Structuring the Ownership of Shares Legal Tip 151: Structuring the Ownership of Shares

 

I am new to all this so my knowledge may be limited or incomplete.

I read somewhere on the internet the other day that trust does not have to distribute income. It can chose to reinvest it.

Yes, trust will own shares in the company not the other way. Trust will not distribute income to the company. It will only distribute to the family if it has to do it. There is no loop in income distribution it just goes one way.

Family is the beneficiary of the trust.
Trust is the shareholder in the company.
Company receives income from business services.

Is that the right path?

 

I read on the internet somewhere that watermelons cure cancer. Doesn't mean it is true.

If the trust owns the shares in the private company then that company would not be acting as trustee. Sounds like you want the company to be buying the ASX shares.

In that situation the company can retain income.

If the company is operating a business then this would be dangerous.

I don't know if it is the right path for you as I know virtually nothing about your situation. but if the same company has operated or is operating a business it may be the wrong path.

 

If it is the right path you then have to consider the structure of the company and the structure of the trust.

Then funding needs to be considered.

 

This is what I want. I think my understanding of trust structures is insufficient at this stage. I thought trusts can be shareholders of a Pty Ltd like an individual but apparently that is not the case

 

There may be a way to restructure and not incur CGT on the proposed idea.

A DT as shareholder in a company which owns shares in a trading business is one way. Or the DT owns all the shares in trading business. (More a CGT problem). Shareholder companies are a form of asset protection as shareholders are not required to cover company losses BUT related party loans can remains a risks so legal advice should be considered too.

The real question is about using profits to buy real estate. ....No CGT discount AND the property remains in the company. Loads of reasons why I wouldnt do this ...Better idea may be a DT receives all profits and it buys property but generally when a DT commences to own shares it means a CGT issue can occur. Another form of trust is a smsf....Age and time dependent there may be strategies.

Question for your accountant - Can you access the small business CGT concessions or the buisness restructure concessions ?
Worth considering if CGT can be addressed

 

They can. BUT the trustee of the trust cant be the trading company. Its like being your own father

 

No, they can be shareholders. But if the company is investing in shares and also running a business what could happen if there is a business dispute? Company could lose its assets including the shares.

 

The plan is to hold nothing in the company and just run the business with proper liability covers. All the income will be passed over to the trust and trust will hold the assets.

 

I thought you meant the company will own shares?

 

I never said that. Did I?

I think I said trust will own shares 'of' the company and by that I meant company shares like a % of the company.

 

Sorry I must have misread it.

So a trust will own shares in a trading company and shares on the asx and also own property?

That should be ok as long as there is a separate trustee of the trust that is not the trading company

 

Yes

But do I get any benefit? My understanding is that the trust can buy shares from the income it earns from the trading company as a shareholder of it and buy shares on the ASX instead of distributing that income to the beneficiaries. Is that a viable option or not? That is the question.