Best tax structure for investor?

[GreatPig]

Re: Tax Structure for Investor

with a company as trustee and a beneficiary of the trust.

I don't think it's a good idea to have the trustee company as a beneficiary of the trust. You want to keep the trustee as a $2 company with no assets, for asset protection reasons, so distributing profits to it would defeat that aim.

Beneficiaries should be maximised when establishing the trust. Adding or deleting down the track may invoke tax consequences.

Beneficiary specifications can be general, like "all grandchildren", so that new-born ones in the future are automatically included.

You can also establish different share classes in the company to allocate different dividends.

You can, but you need to be wary of the Part IVa dividend streaming provisions.

GP

 

[Stormin_Norman]

Over $180,000 - $58,000 plus 45c for each $1 over $180,000.

58,000/180,000 = 32.22%

 

[MS+Tradesim]

What sort of write-offs etc are you talking here though? Isnt the top tax bracket 45%?

He/she's basing it on the effective rate:
http://www.ato.gov.au/individuals/content.asp?doc=/content/12333.htm&mnu=42904&mfp=001/002

Income bracket: $80,001 – $180,000
Tax: $18,000 plus 40c for each $1 over $80,000

Tax on $180k works out to an effective or nominal rate of 32%. $18000 paid on the first $80k + $40k on the next $100,000 = $58k. 58/180 = 32.2%

But this is short-sighted. An individual still pays 40% on every dollar from 80k up to 180k. If the money earned in this bracket had instead been earned through a trust/company structure it would have been distributed to the company and only had 30% or 30k tax paid. That would work out to be an effective rate of 26.6% and would be a tax saving of $10,000. Deduct a few grand for accounting fees etc, you're still ahead.

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GreatPig,

It was general advice. The nuts and bolts of it need to be worked out by jpl with his accountant should he decide to go that road.

 

[GreatPig]

i have private companies and have the clause in them that allows the companies to give me interest free loans, rather then drawing dividends.

I would be interested to know how they do that. Div7a is fairly specific about what you can and can't do in this area, and most things would result in a deemed dividend.

From memory, loans have to be with a minimum interest rate of the one they prescribe (somewhat higher than the offical rate), and paid back over a limited period as P+I. A no-interest loan must be repaid in the same financial year, and can't simply be repaid on 30th June and taken out again on 1st July each year.

GP

 

[GreatPig]

A couple of other things to consider about distributing to a company if you don't expect to take the money out for some years:

1. How are you going to invest the money you've distributed to the company? This money is now company funds, and subject to the relatively strict company rules like Div7a. If you invest in growth assets within the company itself, you lose the 50% CGT benefit. If you transfer to another personal entity, you have Div7a concerns. Investing in income assets or running a business would probably be okay though (eg. a share trading business).

2. If the government lowers the company tax rate in the future, you may lose the ability to distribute all the franking credits, resulting in an effective higher tax rate on those funds. If they follow the rest of the world (except NZ) and get rid of franking credits altogether, uh oh...

GP

 

[beamstas]

I'm an accountant, down in Tasmania!

This thread caught my attention, but reading through it most of what i was going to say has been answered.

What i will suggest is that instead of making a decision from friends/people at online forums (no offence about your advice guys), i would advise you to go and speak with your accountant. He should be able to set you up with a company or trust with no hassle from you at all, whilst also taking into account your personal situation and financial position.

 

[jpldavis]

Thanks guys. I appreciate all the help and of course would follow my accountant's advice before proceeding.

I guess my issue at the moment is that my investment activity/portfolio value is pretty small fry, but with plans to steadily increase over time.

Theoretically, what are the downsides/legal implications of holding investments 'personally' for now, and then later on down the track, when it becomes more important to tax plan effectively with regard to these, to simply transfer these holdings to my new trust structure? Would I have to sell these at market price to the trust (and therefore have unnecessary CGT implications possibly), or could I simply transfer them over with no serious issues?

 

[MS+Tradesim]

Theoretically, what are the downsides/legal implications of holding investments 'personally' for now, and then later on down the track, when it becomes more important to tax plan effectively with regard to these, to simply transfer these holdings to my new trust structure? Would I have to sell these at market price to the trust (and therefore have unnecessary CGT implications possibly), or could I simply transfer them over with no serious issues?

It would essentially involve selling at market price to the trust so you would have CGT events.

What I did was just close out investments held personally as exit triggers occurred and then buy new ones through a trust. It took a few years.

 

[beamstas]

Simply do an off market transfer

http://www.sraa.com.au/forms/form23.pdf

You will have a capital gain, but no cash will actually change hands.

 

[MS+Tradesim]

Bearing in mind an off-market transfer while not involving cash still triggers a CGT event and you may have to pay tax personally on the 'gains'.

 

[beamstas]

Bearing in mind an off-market transfer while not involving cash still triggers a CGT event and you may have to pay tax personally on the 'gains'.

I said you'll still get the CGT.
There is no way of getting out of it. The best thing you can do is wait until the market drops, (ie now) to transfer the shares over. That way your capital gain will be minimal personally, and as the share prices rise the gains will be stuck in the company (remember no discount)

 

[MS+Tradesim]

I said you'll still get the CGT.
There is no way of getting out of it. The best thing you can do is wait until the market drops, (ie now) to transfer the shares over. That way your capital gain will be minimal personally, and as the share prices rise the gains will be stuck in the company (remember no discount)

Yes, you did say 'capital gain' but I was just adding clarification on a point that confuses some people who think because no money changes hand then no tax is payable.

And if, hypothetically, he transfers to a trust, he can still access the discount on any future realised gains distributed to him (or another individual) down the track. Which you know, but you referred to a company in your comment.

jpl, you're best off just discussing all the ins and outs with your accountant.

 

[jpldavis]

Thanks guys. This has been very helpful. Much appreciated.

 

[zcream]

Thanks for an excellent thread.

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a discretionary trust with a company as trustee and a beneficiary of the trust
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With such a structure, can one of the beneficiaries be a foreign citizen ? I am an Ozzie citizen, but have no family here. My brother is a foreign citizen and lives overseas.