Tax ideas!

[RichKid]

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SUPER: Lowest rate of tax, but wait till 60 to get it... plus limited to what you can invest, no margin lending, etc...
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At least here you can choose different types of higher exposure/risk funds (if given the choice by your superfund) or a SMSF can use instalment warrants and other structured products.

 

[Sir Burr]

GreatPig,

Thankyou. Just a point in regards to:

A trust has to distribute all profits (capital gains and income) at the end of each financial year to avoid being taxed at the top rate. Those profits are then taxed in the hands of the beneficiaries at their own normal rates.

and:

Trusts for investments. Personal names only if the amount of funds is too small to justify a trust

OK I'm a bit think but if all the profits are distributed at the end of the financial year to the beneficiaries at their own normal rates, then what tax advantage would there be in using a trust?

I'm talking about, say (for example only) my better half earns $55,000 wages and trading adds another $60,000. If a trust distributes profits to her (again $60,000), then the same tax would be paid?

SB :bier:

 

[GreatPig]

OK I'm a bit think but if all the profits are distributed at the end of the financial year to the beneficiaries at their own normal rates, then what tax advantage would there be in using a trust?

Actually, a very good question.

The advantage of a trust is not the tax rate, but rather the flexibility of distributing profits discretionally to multiple beneficiaries (assuming you have some ). Basically it's like income splitting. But that may be countered to some extent by the fact you essentially have to distribute. Also, if you have a hybrid trust (combined discretionary and unit trust), there are other options available for negative gearing as well. So primarily the advantage from a tax point of view is the flexibility, not the tax rate itself.

Of course the other big reason for using a trust is asset protection. Control but don't own is the motto. If you put things in your own name and get sued for some reason, you could lose them. If you put them correctly in a trust and get sued, then they should generally be safe.

Cheers,
GP

 

[Sir Burr]

The advantage of a trust is not the tax rate, but rather the flexibility of distributing profits discretionally to multiple beneficiaries (assuming you have some ).

Thanks for your points about this GreatPig. At the moment I can't see that what I'm doing (in my situation) can be beaten but you've given me something to talk to the accountant about!

• TRUST - I do not have multiple beneficiaries to distribute profits (I guess this would be good where the beneficiaries do not have other income - kids!).
• SUPER - I already have this but for my own trading I want the flexibility of removing profits which rules out Super.
• COMPANY - I'm a long term trader so I often receive the 50% discount which a Company does not have.

SB

 

[tech/a]

GP and Sir.

Bit more on trusts.

Named benificiaries of any trust should be those with no or little taxable income.
Funds are normally allocated but not distributed,soin effect neither the benificiary or you are taxed upon that amount unless the benificiary goes into a taxable income bracket,and that would normally be a lower bracket than you.

The other disadvantage is that the benificiary can call for their distributed funds at anytime.So say your un employed sister was a benificiary and you allocate $30K a year to her and pay her small tax bill.You do this for 5 yrs.
Sis then comes to you for the $150K---and she can!!

The way around it evidently as I dont know much about this sort of thing is to give Sis the $30k have her bank it and then write you a cheque of $29500 thanks for your time Sis go buy a nice something.

There maybe many in a trust.

Strange the Name TRUST---cause thats what you'll have to do.

 

[GreatPig]

TRUST - I do not have multiple beneficiaries to distribute profits (I guess this would be good where the beneficiaries do not have other income - kids!).

Anyone in your family group, including parents, siblings, etc, can be distributed to (you'd need to check with your accountant for anyone too far removed). And as Tech said, you don't actually have to give them the money. I gather the common thing is to make it a paper entry only, pay their extra tax for them if any, and perhaps give them part of the tax saving for their effort (depending on who it is). To get around the problem of them later wanting the money back, you can get them to sign a deed of gift when they get their distribution, gifting it all back to the trust (except for any amount you want to give them for their trouble). Of course you'd want to arrange that with them in advance before distributing to them. A work colleague has done this before with one of his relatives.

You have to be careful with distributing to kids under 18. You can give them up to around $700-odd a year (can't remember the exact figure off the top of my head), but after that they get taxed at a penal rate of 66%.

And if you wanted to distribute to anyone on a government benefit, you should check with them about how it would affect their benefit. My trust deed explicitly forbids distributing to people on a range of such benefits.

SUPER - I already have this but for my own trading I want the flexibility of removing profits which rules out Super.

There are many views on super. Mine is that unless you're close to retiring, super is money down the toilet :.

COMPANY - I'm a long term trader so I often receive the 50% discount which a Company does not have.

And with the lowering of personal tax rates in July, companies become even less attractive.

Cheers,
GP

 

[Prospector]

Ditto to all that GP has said about Trusts. We have a 20 year old son to whom we were able to distribute income, he was rather pleased with his salary for that year! As we have paid for private education fees since the day he started school, and have paid all his HECS fees, then we are able to write off any money he technically could ask for.

Our 16 year old gets only the $700 from the Trust because of that 18 year old rule, yet he works at the local pizza hut so I dont see why they cant lower the distribution age to 16.

I dont like Trusts because as a result of the income received from the Trust we have now been brought in to the old 'provisional tax' of having to pay expected income from distributions up front. We have now scrapped the Trust because it meant we were not able to add to our super using the 9% rules as employees, and because of other issues, dont want to risk varying our quarterly 'provisional' tax payments because of the penalties involved.

We have one more payment in July and then will vary to zero for the next financial year.

We are a few years off retirement but it is in sight so we plan to salary sacrifice into that too - we do this around mid June when we hive off extra profit from our company into our Super.

 

[GreatPig]

I dont like Trusts because as a result of the income received from the Trust we have now been brought in to the old 'provisional tax' of having to pay expected income from distributions up front.

But that would be the same if you had the investments in your own name.

And what do you mean by paying up front? Provisional tax was scrapped some years ago and they now use the PAYG system, which is not paying up front. You only pay after you've earned the income.

I think any method you use to receive the funds regularly will result in you being in the PAYG system if the amount is high enough.

Cheers,
GP

 

[coladuna]

But that would be the same if you had the investments in your own name.

And what do you mean by paying up front? Provisional tax was scrapped some years ago and they now use the PAYG system, which is not paying up front. You only pay after you've earned the income.

I think any method you use to receive the funds regularly will result in you being in the PAYG system if the amount is high enough.

Cheers,
GP

You are exactly right. No matter whether you trade in your own name, set up a company or a trust, you will get hit with PAYG instalments.
If you trade in your own name, however, I think it only kicks in after your investment income (non-PAYGW income) exceeds $2,000 from memory.

Before you set up a company or trust, you have to bear in mind that you'll incur additional costs in setting it up and in compliance. Unless you have a really big portfolio that generates huge amount of income, I don't think it's worth the hassle for most people.

 

[Prospector]

But that would be the same if you had the investments in your own name.

And what do you mean by paying up front? Provisional tax was scrapped some years ago and they now use the PAYG system, which is not paying up front. You only pay after you've earned the income.

I think any method you use to receive the funds regularly will result in you being in the PAYG system if the amount is high enough.

Cheers,
GP

In some cases you might get the income 'as you go' but we only receive a distribution at the end of the financial year when we know how much profit we have made. But the tax office sends us IAS forms (I think that's the Acronym - Instalment Activity statements????maybe they are called PAYG?) each quarter based on the amount of the distribution we received LAST taxation return for the CURRENT year. The distributions however, could be 1000's of Dollars different each financial year though! If you vary the amount you pay and you get it more than 15% wrong, then there are very stiff penalties!

I used the term provisional tax to my accountant a few weeks ago and he said yes, effectively while the ATO dont use this phrase anymore, the concept is the same!

Cheers

 

[GreatPig]

In some cases you might get the income 'as you go' but we only receive a distribution at the end of the financial year when we know how much profit we have made. But the tax office sends us IAS forms (I think that's the Acronym - Instalment Activity statements????maybe they are called PAYG?) each quarter based on the amount of the distribution we received LAST taxation return for the CURRENT year.

Don't you get a choice of paying either a specified amount or an amount based on a specified instalment rate?

I mainly get these for a company now (BAS forms), as I try not to take any extra income myself, but I found an ATO document from a few years ago where I got put into the PAYG system, and it gave two options: either a fixed amount specified by the ATO, or an amount based on an instalment rate and my actual income for the quarter (which is what the BAS forms have too). The choice can only be made once a year though, with the same method being used for the other three quarters.

If I use the instalment rate method, which I usually do, then I only pay that percentage on income I've received in the relevant quarter. So a trust distribution would fall into the fourth quarter and only have tax paid on it a couple of months or so later.

Cheers,
GP

 

[Prospector]

Don't you get a choice of paying either a specified amount or an amount based on a specified instalment rate?

Cheers,
GP

Hi GP
Yes, you get the choice to vary, but if you vary and dont pay enough (when it comes to the end of the financial year reconciliation) if you are out by more than 15% it is almost treated like Tax avoidance! It is treated far more severely than the usual company PAYG, which I usually pay without it concerning me. So if I varied it at the start of the year, then I am stuck with it for the rest of the year. It also becomes a bit more complex when you have things like Interest income too!

Oh well,only 1 more to go and then I will be back to just normal PAYE tax!

 

[GreatPig]

you get the choice to vary

That's not what I mean. Varying is a different thing.

The PAYG forms I got (at least for the first quarter) gave two options: either pay a fixed amount, or pay an amount based on an instalment rate and actual income for the quarter.

And for whichever option I chose, there was the added option of varying either the amount or the instalment rate.

Cheers,
GP

 

[Smurf1976]

I have always viewed my tax return as a kind of report card. Given that I can't change the law and intend complying with it, I want to get a huge tax bill since to do so I must have earnt a lot of money during the previous 12 months.

Of course I claim deductions etc but IMO it's better to make a profit and lose up to 48.5% of that in tax than to make nothing and pay no tax.

On a side issue, does anyone know if there's anything wrong with delaying claiming money owed by your employer (overtime, allowances etc). With the tax changes, delaying any such claims until past June 30 (only a few weeks now) could significantly increase their after tax worth depending on where you sit within the tax brackets. For some it could mean paying 30% tax instead of 42% etc which isn't a bad return for only a few weeks waiting and of course it's virtually guarnateed unless you earn more than you are expecting next year and end up back in a higher tax bracket. Even then there's still some benefit with the reductions to the old 42% and 47% rates. All assuming that the boss doesn't mind late claims for overtime etc. But is doing such a thing legal?

 

[Smurf1976]

Hi GP
Yes, you get the choice to vary, but if you vary and dont pay enough (when it comes to the end of the financial year reconciliation) if you are out by more than 15% it is almost treated like Tax avoidance! It is treated far more severely than the usual company PAYG, which I usually pay without it concerning me. So if I varied it at the start of the year, then I am stuck with it for the rest of the year. It also becomes a bit more complex when you have things like Interest income too!

Oh well,only 1 more to go and then I will be back to just normal PAYE tax!

Beware that some of these forms have to be sent back to the ATO even if you are just paying the amount they ask for whilst other times you just pay and keep the form. I nearly ended up in a LOT of trouble, even though I had paid on time, because I didn't send the form in. A very strongly worded letter arrived...

Thankfully the ATO accepted my explanation that when I first came into the system I rang them and asked them what to do and they said just pay the amount and no need to do anything else. Read the form! If it askes you to send it in even if just paying the standard amount then don't forget to send it in!

That was last year and I think I'm now being investigated by the ATO as a result. They haven't done an audit so far but they're "still processing" last year's tax return. Just as well I have all my receipts etc.

 

[Sir Burr]

Of course I claim deductions etc but IMO it's better to make a profit and lose up to 48.5% of that in tax than to make nothing and pay no tax.

Of course I claim deductions etc too and believe it's better to learn what is available to minimise tax legally. IMO it's better to loose 16.5% in tax than to make nothing and pay no tax.

SB

 

[Prospector]

Beware that some of these forms have to be sent back to the ATO even if you are just paying the amount they ask for whilst other times you just pay and keep the form. I nearly ended up in a LOT of trouble, even though I had paid on time, because I didn't send the form in. A very strongly worded letter arrived...

.

You know, I think this heavy handed attitude is totally unwarranted! Actually, it sucks! You paid the money on time for goodness sakes! :swear:

I recently lost a large parcel sent through Australia Post - how can the ATO prove you didnt send it, especially if you have had an excellent past record!

I too received a letter like this when I forgot to send in a quarterly BAS. The money had been paid on time though - just forgot to post.

On the other hand, I accidentally paid a few thousand in to my son's Tax account instead of it going into the Company Tax account through online-banking. I didnt realise what I had done until I was speaking with the ATO because they had sent the company (my company by the way) a statement which showed I owed them this money. Looking at my online banking statement, all I could see was the correct amount had been "b-payed" to the ATO. While speaking to the ATO I checked the customer number with them and while they wouldn't confirm it was my son's account (privacy issues) they were very understanding and could see that it was a genuine mistake!
So no penalty at all - and no investigations either! Total schizo!

I wouldnt worry too much Smurf - I think it is just coincidence and they are probably just very busy at the moment. They usually jut process the return as is, and then if an audit is required then they go back!