Trading as a Trust or Business Entity

[bellenuit]

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 make it a bit more, just over $140K

If my calculations are correct, using the 2011/2012 scale if you earn $140K of taxable income, you pay $39,750 tax and $2,100 Medicare Levy. All up $41,850 or 29.9%.

 

[Ves]

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?

I don't know the new rules particularly well (ie Bamford) but it depends if there is are any debit loans to individuals in the trust (ie. cash has been taken out into personal bank accounts).

You wouldn't pay any actual cash into the company in this structure (just an end of year accounting distribution journal). The cash stays in the Trust until you need it. You will only have a problem, if I understand correctly, if you need to take it out of the trust to an individual beneficiary. But as you said, the company can pay a dividend to the Trust (if it is set up as the share holder) to decrease these entitlement loans.

sorry really hard to explain over a forum; we need some glossy diagrams!

PS: I will pass on the consolidation question, my mind is well and truly on AFL round one this weekend!

 

[McLovin]

You wouldn't pay any actual cash into the company in this structure (just an end of year accounting distribution journal). The cash stays in the Trust until you need it.

Actually, with a corporate bene you need to take the cash out and put it in the company's account. The ATO are pretty much saying they don't like bucket companies.

I don't know much about Bamford. To be quite honest, I think the best thing to do is find a good accountant and let them worry about it! My general approach is, it's too complicated it's probably not legal.

I've got a mate who is a tax lawyer with one of the Big Four accounting firms. I'll ask him tonight.

I will pass on the consolidation question, my mind is well and truly on AFL round one this weekend!

What's AFL?

 

[McLovin]

I make it a bit more, just over $140K

If my calculations are correct, using the 2011/2012 scale if you earn $140K of taxable income, you pay $39,750 tax and $2,100 Medicare Levy. All up $41,850 or 29.9%.

You're probably right. I just picked a number out of the air.

 

[Ves]

Actually, with a corporate bene you need to take the cash out and put it in the company's account. The ATO are pretty much saying they don't like bucket companies.

I don't know much about Bamford. To be quite honest, I think the best thing to do is find a good accountant and let them worry about it!

I've got a mate who is a tax lawyer with one of the Big Four accounting firms. I'll ask him tonight.

Good idea - if you find out anything please post here. There were major rule changes after I switched to SMSF accounting. From the little I have read and been told about the ATO is heavily against using Trusts as a way to save tax (ie. changes to minor beneficiary tax free thresholds, bucket company distributions).

I would say it kind of defeats the purpose if you actually have to pay cash to the company. Unless you plan to pay it back out as a dividend or invest it in there. Just makes everything seem very complicated.

 

[Starcraftmazter]

I make it a bit more, just over $140K

If my calculations are correct, using the 2011/2012 scale if you earn $140K of taxable income, you pay $39,750 tax and $2,100 Medicare Levy. All up $41,850 or 29.9%.

Not sure that's correct.

Let's use the new 12-13 tax brackets.

If you earn a $37,000 salary and make $20,000 from trading in a year, you would pay in total $3,572 + $6,500 = $10,072 tax

If you earn the same $37,000 salary but have a company which makes $20,000 through your trading you will pay a total of $3,572 + $6,000 = $9,572 tax.

The same will be true for all salaries higher than that (or if you make that amount through trading under your own name, doesn't matter).

And it will be more true for the higher tax brackets where you will save even more money.

At the current tax brackets, you would have to make $80,000 before every dollar afterwards is taxed less under company tax than your marginal.

 

[McLovin]

Starcraft, I don't think we were discussing a scenario where someone has a separate day job.

 

[Ves]

Thinking about it, you could pay the equivalent salary of $37,000 from the company and achieve the same result (except you also get a tax deduction in the company).

 

[Starcraftmazter]

Starcraft, I don't think we were discussing a scenario where someone has a separate day job.

Does it make a difference though? My point applies to any income over 37k, whether it's a salary, wage, capital gains, or whatever else.

Thinking about it, you could pay the equivalent salary of $37,000 from the company and achieve the same result (except you also get a tax deduction in the company).

Quite true. That might be the easiest thing to do for professional traders.

 

[McLovin]

Does it make a difference though? My point applies to any income over 37k, whether it's a salary, wage, capital gains, or whatever else.

Sure. As you earn more, the company structure (assuming no trust) will pay less tax than an individual. At $500k/annum you would be paying almost $50k less in tax/year if the income was generated through a company rather than an individual.

 

[Ves]

Does it make a difference though? My point applies to any income over 37k, whether it's a salary, wage, capital gains, or whatever else.

Just a quick aside; and I am sure this will not affect traders. But for long term holds over 12 months a company does not get the CGT discount.

Also; forgot to mention before if you pay a wage to yourself from a company you will also have to pay equivalent super gaurantee contributions (SGC) and be registered for PAYG withholding. Probably does not change much, but it is added complication and compliance that you need to be prepared for.

 

[craft]

Don’t forget the SMSF in the structure.

And really need a trust in there for CGT exemptions reasons and discretionary distribution.

Efficient distribution this year is wage/dividend/distribution of 130K with 50K paid into SMSF as deductable contribution.

80K income @ marginal 31.5%

50K SMSF @ 15% (higher limits if you are older)

Remainder taxed as company profit @ 30% (potential becomes 28% down the track)

Next year

Marginal rate goes to 34% for 80K of income – could still be worth paying out to 80K and incurring the extra 4%.(6%) to get flexibility of some money in personal name

If you have a spouse/partner, all times 2

Now that Labour has tightened up contribution caps and Family Tax Benefit Income definitions, system can’t be rorted like it used to – but it still far better then what the poor PAYG earner cops.

 

[bellenuit]

Not sure that's correct.

Let's use the new 12-13 tax brackets.

If you earn a $37,000 salary and make $20,000 from trading in a year, you would pay in total $3,572 + $6,500 = $10,072 tax

If you earn the same $37,000 salary but have a company which makes $20,000 through your trading you will pay a total of $3,572 + $6,000 = $9,572 tax.

The same will be true for all salaries higher than that (or if you make that amount through trading under your own name, doesn't matter).

And it will be more true for the higher tax brackets where you will save even more money.

At the current tax brackets, you would have to make $80,000 before every dollar afterwards is taxed less under company tax than your marginal.

Yes, you are correct. There was a flaw in my logic in that I was trying to see what an individual's taxable income should be before they on average pay more than 30% tax. But that is the wrong way to look at it, as once their marginal rate is above 30%, they are better off earning additional income in a company structure.

Although $80K+ is where the tax rates (2011/2012) jumps from 30% to 37%, if you add in the medicare levy which is 1.5%, technically you are better off earning additional income in a company structure when your personal taxable income goes above $37K as the tax rate + medicare levy will be 31.5% above that.

 

[McLovin]

Yes, you are correct. There was a flaw in my logic in that I was trying to see what an individual's taxable income should be before they on average pay more than 30% tax. But that is the wrong way to look at it, as once their marginal rate is above 30%, they are better off earning additional income in a company structure.

Yes, that's correct if there is a trust involved and profits can be distributed through that structure. Otherwise you need to look at which will pay the lowest tax rate. In that case a company structure wins the more money you make.

 

[Starcraftmazter]

Also; forgot to mention before if you pay a wage to yourself from a company you will also have to pay equivalent super gaurantee contributions (SGC) and be registered for PAYG withholding. Probably does not change much, but it is added complication and compliance that you need to be prepared for.

Could you negate this by paying dividends instead?



On a somewhat related note...

Let's say you are a trader, however you also want to allow some of your family members and/or friends to benefit from your trading mechanism, and you wish to apply it to both your SMSF and your non-SMSF finances.

In order to not have many different broker accounts (which is a logistical nightmare), would I be correct to say you could have all of those as members of a trust, and everyone would own a portion of the trust equivalent to their investment?

And you just pool all their trust money into one broker account and trade as the trust.

Is it possible to fluently add and remove money to/from a trust by any member?

Cheers

 

[McLovin]

Could you negate this by paying dividends instead?



On a somewhat related note...

Let's say you are a trader, however you also want to allow some of your family members and/or friends to benefit from your trading mechanism, and you wish to apply it to both your SMSF and your non-SMSF finances.

In order to not have many different broker accounts (which is a logistical nightmare), would I be correct to say you could have all of those as members of a trust, and everyone would own a portion of the trust equivalent to their investment?

Yes, you set up a unit trust instead of a discretionary trust. However, a unit trust does not offer the same asset protection as a family trust. The units you have in the trust are property and can be taken by creditors.

Generally if you set up a unit trust, then your interest in the trust should be owned by a discretionary trust. Of course all these trusts and trustees cost money to set up and run.

 

[Starcraftmazter]

Yes, you set up a unit trust instead of a discretionary trust. However, a unit trust does not offer the same asset protection as a family trust. The units you have in the trust are property and can be taken by creditors.

Generally if you set up a unit trust, then your interest in the trust should be owned by a discretionary trust. Of course all these trusts and trustees cost money to set up and run.

Let's say I would be looking to exclusively trade in the stock-market, and I wouldn't hold anything for over a year anyway.

Are there still any downsides? And if so, is there a more efficient way to do this?

 

[McLovin]

Let's say I would be looking to exclusively trade in the stock-market, and I wouldn't hold anything for over a year anyway.

Are there still any downsides? And if so, is there a more efficient way to do this?

A unit trust is the only way to do it. A company won't give you the tax flexibility.

Of course the bigger issue to consider is that you're now running an investment scheme with a whole different set of regulatory issues and investment documentation and reporting requirements.

 

[Starcraftmazter]

Of course the bigger issue to consider is that you're now running an investment scheme with a whole different set of regulatory issues and investment documentation and reporting requirements.

Do you really need to worry about it? I mean it's not a public managed fund or anything, just a family trust per say.

 

[McLovin]

Do you really need to worry about it? I mean it's not a public managed fund or anything, just a family trust per say.

Apparently not...

As a result, any unit trust with more than 20 investors, or any unit trust with less than 20 members that is operated by an entity running several such schemes, is likely to be regulated as a managed investment scheme under the Corporations Act. Only the operators of small, closely-held unit trusts will be able to operate without an AFSL.

http://www.gadens.com.au/publications/Pages/Multijuridictional-fund-marketing-in-Australia.aspx