Trading as a Trust or Business Entity

[lbz321]

Hi all,

After the past couple of years in the 'School of Hard Knocks' learning to trade, I am confident I am now becoming consistently profitable and am looking to the future with regards to tax minimisation.

I am curious as to the advantages and disadvantages of registering a business to trade under as opposed to just trading as an individual. Also the advantages and disadvantages of trading under a Trust structure. I primarily trade CFDs on US Stocks and also trade currencies with IG Markets currently making on average 20+ trades a month.

I also hope to diversify into real estate investments in the near future. As I don't have a great knowledge when it comes to tax I'm hoping other forum members might be able to advise me on what has worked for them.

If anyone knows of any good websites/other posts covering this subject I'd be very grateful.

Thanks guys,

Dave

 

[McLovin]

There is no benefit to trading as a business as opposed to a as an individual. A business is just a name attached to an individual. If you are looking at setting up a company to trade through then that is different. The company will pay flat 30% on all profits. So you need to work out what your marginal tax rate will be. For a trust structure it really depends on how many beneficiaries you have. Aside from shielding the assets in the trust one of the primary benefits is the ability to spread the tax liability across all the beneficiaries in the most tax efficient way. NB that all income must be distributed that the end of each year. Anything left in the trust will be taxed at the top marginal rate. This doesn't mean the money needs to be physically moved out of the trust (although it does in the case of a corporate beneficiary) just that it must be distributed for tax.

I would find a good accountant who can explain what the best structure is for you. Certainly they are the only one qualified to give you advice as opposed to opinions which is all you can get on here.

 

[skc]

There were some recent changes to distributing income to minors (from memory) that has made the discretionary trust less appealing than previous years.

Still not a bad structure if you have family / partner with low/little income who you trust (and hey trust you) in terms of money.

In fact I am pretty sure that's why it's called a "trust" structure .

 

[Starcraftmazter]

The company will pay flat 30% on all profits.

Wow I never thought of that. That's awesome! Especially seeing as how the government wants to lower it to 28%

Do you have any idea of what sort of regulatory fees you'd have to pay to maintain a company for trading?

Edit: Wait a minute, won't you still have to pay tax on the money you would get from your company, meaning it would be taxed twice? Or does it work differently?

 

[bellenuit]

Edit: Wait a minute, won't you still have to pay tax on the money you would get from your company, meaning it would be taxed twice? Or does it work differently?

You can pay yourself franked dividends which will give you franking credits to offset the company tax paid, just like dividends you receive from other companies.

The regulatory fees are just over $200pa (ASIC fee) and the rest will be what your accountant charges to do your accounts and tax return. Mine charges $700, so all up the company costs me under $1000pa to run. However, my accounts are straightforward. Some can pay several thousand to the accountant.

 

[Starcraftmazter]

You can pay yourself franked dividends which will give you franking credits to offset the company tax paid, just like dividends you receive from other companies.

But then that defeats the whole point of setting up a company to pay a lower tax rate on trading profits - doesn't it?

Or do you do it for other benefits like maybe buying equipment in the company name?

 

[McLovin]

But then that defeats the whole point of setting up a company to pay a lower tax rate on trading profits - doesn't it?

Or do you do it for other benefits like maybe buying equipment in the company name?

Are you asking whether the profits need to be distributed? Then the answer is no. Only once you take them out of the company will you have to pay personal income tax.

Of course you can also instead pay yourself a wage, which reduces the company profit and if your marginal rate is under 30% will reduce the total tax.

 

[Starcraftmazter]

Are you asking whether the profits need to be distributed? Then the answer is no. Only once you take them out of the company will you have to pay personal income tax.

Of course you can also instead pay yourself a wage, which reduces the company profit and if your marginal rate is under 30% will reduce the total tax.

Well I'm wondering if setting up a company to trade under can bring any tax advantages?

It seems like no matter what you do, you will still end up paying your marginal tax rate (that is in the end, everything will work out to be the same), so it cannot have any benefit - providing your marginal tax rate is over 30.

So my question is, if your marginal tax rate is over 30pc - or more specifically higher than whatever the company tax rate happens to be, is it possible to get any tax benefit out of trading as a company rather than as yourself?

And if not, is there any other benefit at all?

I suppose if you do not pay yourself either dividends or wages, and you accumulate the profits in your company, you would have more money than otherwise to trade with and so can make exponentially more profit?

Hmmm

 

[McLovin]

So my question is, if your marginal tax rate is over 30pc - or more specifically higher than whatever the company tax rate happens to be, is it possible to get any tax benefit out of trading as a company rather than as yourself?

Yes, you don't distribute the profits.

 

[Ves]

The Division 7A rules are set up to stop people from effectively making a ****-load of money at 30% tax rate, then taking the cash out of the company and into a personal bank account without tax consequences.

Also not sure; but I take it that investment income is exempt from the PSI rules? Does this change if you have a trading business?

Obviously paying a dividend or wage (or even re-investing the profits) can limit this; but if you have profit in excess of the 30% marginal tax rate in your individual circumstances (I think this is about $80,000 currently without bothering to look) then you will be still paying a higher tax rate if you take money out of the company. Although, you could arguably make your husband or wife a director and pay them a dividend too. Depends on your asset protection requirements whether this would be suitable.

Also handy to note that you are disadvantaged by having a company if you do not earn profits in excess of the 30% tax threshold for an individual. Why? Because your average rate of tax will be higher as it is a flat tax rate within a company. A company pays no medicare levy, however.

A lot of people set up a trust structure with relevant individuals and an additional "bucket company" to distribute profits in excess of the 30% individual tax threshold. Same Division 7A rules apply with the added complexity of the Bamford Case Rules in this set up. I am not 100% up to date with this as I no longer work in business services taxation but I believe it has to do with undistributed present entitlements to a company. Ie. you made a taxable distribution to your bucket company but did not pay it as cash, instead you took the cash out of the trust and banked it into a personal bank account.

Remember franking credits and family trust election rules also apply when considering a trust.

Also losses in both a company and trust are limited to that entity. You cannot use them to offset income from your own tax return or another entity.

Sorry for the mess; this is hard to articulate over a forum.

 

[Starcraftmazter]

Obviously paying a dividend or wage (or even re-investing the profits) can limit this; but if you have profit in excess of the 30% marginal tax rate in your individual circumstances (I think this is about $80,000 currently without bothering to look) then you will be still paying a higher tax rate if you take money out of the company.

Keep in mind the government plans to increase taxes so that you pay 32.5c to a dollar after $37k or so in the coming financial year, so this is indeed an issue which will affect a lot of people.
http://www.ato.gov.au/individuals/c...002/046/002/002&mnu=42957&mfp=001/002&st=&cy=

Sorry for the mess; this is hard to articulate over a forum.

Not at all, your insight is excellent.



I don't suppose it's possible to buy assets as a company and sell them to yourself at a very discounted price?

 

[waimate01]

But then that defeats the whole point of setting up a company to pay a lower tax rate on trading profits - doesn't it?

Or do you do it for other benefits like maybe buying equipment in the company name?

Think of it as having the choice of three different tax regime environments:
- super: 15%, lots of restrictions, and the game can change on a governmental whim
- company: 30%, few restrictions
- personal: 48% or whatever it is this year, no restrictions

If you bring money out of the company, you'll end up paying personal marginal rates on it, but if you can leave it in the company, it compounds at a lower tax rate.

The company can buy some things (eg desks are ok, holidays are not), and gets the GST refunded.

Do note, however, that the 12-month 50% CGT reduction does not apply for companies.

 

[Ves]

I don't suppose it's possible to buy assets as a company and sell them to yourself at a very discounted price?

Fringe benefits tax? (I think - otherwise it'd fall under the anti-tax avoidance provisions in Part 4A)

Unfortunately the tax legislation in Australia is pretty much a fortress for any interesting inter-entity schemes.

 

[Ves]

Keep in mind the government plans to increase taxes so that you pay 32.5c to a dollar after $37k or so in the coming financial year, so this is indeed an issue which will affect a lot of people.
http://www.ato.gov.au/individuals/c...002/046/002/002&mnu=42957&mfp=001/002&st=&cy=

Thanks - forgot when that was all coming in.

The whole company structure may be more beneficial on lower incomes if my initial impressions are correct.

The thing is to run a company and / or a trust you are going to pay higher accounting fees (unless you can complete the returns yourself) and you will also need a good trust deed for the Trust and a good constitution for the Company that ensures you are protected and can do what you intend.

 

[McLovin]

Also not sure; but I take it that investment income is exempt from the PSI rules? Does this change if you have a trading business?

My understanding of the PSI rules is that they are designed to capture people who would otherwise be on PAYG but are using the company structure for no other reason than tax minimisation.

Fringe benefits tax? (I think - otherwise it'd fall under the anti-tax avoidance provisions in Part 4A)

The ATO would establish a market value for the assets and then levy tax according to that. Plus you'll get stung with stamp duty.

It's the oldest trick in the book and one they've been all over for years. The problem with playing around with tax is once you're on the ATO's radar you never get off it.

 

[McLovin]

The whole company structure may be more beneficial on lower incomes if my initial impressions are correct.

You think? You'd need to be earning North of $100k before you paid the same amount of tax as would be levied on a company. Unless I'm missing something.

 

[Ves]

My understanding of the PSI rules is that they are designed to capture people who would otherwise be on PAYG but are using the company structure for no other reason than tax minimisation.

You're right - bit of a brain fade on my behalf. The asset (the shares) is generating the income and there are no other parties involved.

 

[McLovin]

You're right - bit of a brain fade on my behalf.

I'll shoot a question about consolidation at you then?

 

[Ves]

You think? You'd need to be earning North of $100k before you paid the same amount of tax as would be levied on a company. Unless I'm missing something.

I'm thinking more of the Trust - Company - Individual set up.

For every incremental dollar over $37,000 you would distribute it to the bucket company. You'd be saving 2.5% tax.

It's different for only company and individual (which is what you are referring to) as it has to do with the overall average tax rate of the two entities.

Hmm maybe I ma getting myself confused again, however.

 

[McLovin]

I'm thinking more of the Trust - Company - Individual set up.

For every incremental dollar over $37,000 you would distribute it to the bucket company. You'd be saving 2.5% tax.

It's different for only company and individual (which is what you are referring to) as it has to do with the overall average tax rate of the two entities.

Hmm maybe I ma getting myself confused again, however.

What are the rules around distributing money to a corporate bene and then paying the cash back into the trust? I could be wrong but doesn't it get treated as a dividend and taxed accordingly?