Home – New Forums Money matters How to handle profit in a trust

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  • #972690
    Geronimo
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    My forecast is showing a profit of just over $100k for this financial year. My structure is a family trust with a company as trustee. I really don’t want to distribute the total to my wife and myself, as we’ll get burned with income tax, as I’ve been drawing a wage too, so this would be on top of it.

    My question is this. Is there any avenue to keep money in the trust over financial years? My concern is that while all is going great guns at the moment, it things slow down in July, suddenly there’s no money to pay my wages or expenses anymore.

    I have considered purchasing a vehicle (which we need to do anyway), but understand there are no benefits there. Is the trust able to purchase property or investment in a managed fund?
    I don’t need anything of great value for the business, so pending on that would just seem like a waste of money to me.

    Any thoughts on the matter would be greatly appreciated.

    I should add, this is an awesome and unexpected problem to have :-)

    #1057493
    hmirz
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    Hi Elsee

    Good situation to be in – well done!

    There are a number of things you can do with the extra income in the trust and you potentially could devise an alternative strategy to distributing the trust’s income to the beneficiaries of your family trust, especially as it is likely to be a discretionary family trust. The strategies would save you paying an amount of income tax that you may otherwise have to pay if the trust distributed to you and your wife as beneficiaries in the manner described by you.

    I wouldn’t rely on advice given on this forum unless you provide more information about your individual circumstances and the person providing you with advice has the benefit of sighting your family trust’s Trust Deed to see what is and what is not legally permissible in your case before you can contemplate saving tax.

    Probably best to consult a tax lawyer who has mastery of trust law, trust deeds, superannuation and managed investments rather than an accountant in your scenario.

    Good luck.

    Cheers,
    Hamid Mirza
    Barrister-at-Law
    http://www.panachelegal.com

    #1057494
    Geronimo
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    hmirz, post: 70687 wrote:
    I wouldn’t rely on advice given on this forum …
    Don’t worry, not that silly. It does however help to go into discussions with some knowledge of what possibilities may exist.

    Thanks for your reply

    #1057495
    graham crane
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    G’day

    Hamid is right. as as a tax accountant myself we can give you advice of how to invest and distribute the funds but its all governed by the deed and needs the go-ahead from someone legally qualified anyway to be prudent. Financial planners would get someone legally trained to make sure its ok too. ATO looks at family trust distributions closely.

    In terms of strategies, I think you need to give more information, otherwise the forum threads are just not big enough and how long is a piece of string…

    My two cents worth,
    Rgds,
    Graham

    #1057496
    Dave@SCBA
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    Hi Elsee,

    Not sure if you have kids or not but they can be very handy to distribute to use up certain offsets – for the 2009/2010 tax year the maximum amount $3,000 per minor (under 16)

    In regards to purchasing a vehicle there can be some benefits (15% depreciation deduction if a SBE, plus interest if a a HP or Chattel Mortgage is taken out) but generally a vehicle is not an Income producing asset

    Given you said “if things slow down in July, suddenly there’s no money to pay my wages or expenses anymore” it does not make alot of sense to add to your things to pay off.

    There are many options you may consider to invest in such as shares, managaed funds or property (Obviously seek financial advisers… advice) keep in mind that these investments are not likely to give you an upfront deduction anyway, leaving you with less cash and the same tax problem!

    It may be worth investing your hard earned back into your own business, that way you may be able to have more years of this “good problem”

    Cheers,

    Dave

    #1057497
    James Millar
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    hmirz, post: 70687 wrote:
    Hi Elsee

    I wouldn’t rely on advice given on this forum unless you provide more information about your individual circumstances and the person providing you with advice has the benefit of sighting your family trust’s Trust Deed to see what is and what is not legally permissible in your case before you can contemplate saving tax.

    Probably best to consult a tax lawyer who has mastery of trust law, trust deeds, superannuation and managed investments rather than an accountant in your scenario.

    I’d suggest that’s way overkill for the simplicity of the issue. Assuming for the moment that you have a fairly broad generic deed (which is a fair assumption for this purpose) then you will likey have a broad range of options with regards to beneficiaries. That is very easy to check.

    The real issue is that you have used a structure that is not itself particularly well suited to a retained earnings strategy. Generally speaking your trust will distribute profits each year and unless there are beneficiaries on favourable tax rates you may pay full marginal tax rates (although not at the quantum of dollars that you refer to). You could possibly add a corporate beneficiary which acts as a genuine investment entity but even those are facing issues under recent Div 7a developments.

    I’d run the numbers on the tax estimates first. You may find that it produces pretty low average tax rates and that may be the best you can hope for. If there is something to potentially be gained by using alternate beneficiaries then you can review the deed at that time.

    Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900
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