Bog standard company/trust structure in 2014?

As suggested, I am interested in knowing what is the typical company/trust structure that a couple would use for income streaming when starting a small business in 2014. I have been doing some reading and see that previously the bog standard structure was roughly:

• Discretionary Trust as the trading entity w/ corporate trustee
• Husband and Wife as beneficiaries of trust
• Additional corporate beneficiary as 'bucket' company

Income would be distributed to the husband and wife up to the ~30% tax bracket, with the remaining income distributed to the bucket company but still used by the trust trading entity (essentially).

However, from my readings it would appear that this structure is no longer popular due to a change in tax rulings in late 09/10. What do you believe is the typical small business trust/company structure in today's market? Or has nothing changed?

Trading company with shareholder being family trust controlled by directors.

What about wages?

If people are working for a trust as a business and not drawing any wages this is underremunation and has asset protection consequences. There may also be tax issues.

What changes occured in 09?

Terry_w said:

What changes occured in 09?

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I think he's talking about the Division 7A rules plus the fact that many trustees don't distribute the business income until after they do their tax return when they should be doing it earlier.

Ah here we go, I found some images that explain what I mean in simple terms. And yes I was referring to the Division 7A rules.

Previously the popular structure was:



But I believe the preferred structure looks more like:



And this matches the response that Aaron has given which is handy Thanks Aaron.

So the company is the trading entity. The Husband would be the director of the company I assume. The family trust is the shareholder of the company. The Husband and Wife are beneficiaries of the family trust. And then the trust would have a corporate trustee with (again, I assume) Husband and Wife as directors?

Does that sound about right? I don't believe anyone is working for the trust in this structure Terry?

But who is working for the company?

Husband. So he would need to be paid a wage by the company? Is that how it works?

halcior said:

As suggested, I am interested in knowing what is the typical company/trust structure that a couple would use for income streaming when starting a small business in 2014. I have been doing some reading and see that previously the bog standard structure was roughly:

• Discretionary Trust as the trading entity w/ corporate trustee
• Husband and Wife as beneficiaries of trust
• Additional corporate beneficiary as 'bucket' company

Income would be distributed to the husband and wife up to the ~30% tax bracket, with the remaining income distributed to the bucket company but still used by the trust trading entity (essentially).

However, from my readings it would appear that this structure is no longer popular due to a change in tax rulings in late 09/10. What do you believe is the typical small business trust/company structure in today's market? Or has nothing changed?

Click to expand...

Halcior,

Can you please explain that why there is a problem now with this set up?

I have something very similar.

I have a family trust controlled by a corporate trustee running my business.

I work for the trust and get paid a market rate salary. PAYG tax and super included as well. Proper employment contract drawn up.

All business income and expenditure runs through a single account and any profit is distributed to beneficiaries. Wife, kids, no bucket company yet. The distribution of profit is done before end of financial year. We aim for 180K gross taxable per person.

Why do you need another company to run the business then a corporate trust to own its shares?

I must be missing something.

evan1875 said:

I have a family trust controlled by a corporate trustee running my business.

I work for the trust and get paid a market rate salary. PAYG tax and super included as well. Proper employment contract drawn up.

All business income and expenditure runs through a single account and any profit is distributed to beneficiaries. Wife, kids, no bucket company yet. The distribution of profit is done before end of financial year. We aim for 180K gross taxable per person.

Why do you need another company to run the business then a corporate trust to own its shares?

I must be missing something.

Click to expand...

Sounds good to me.

evan1875 said:

Why do you need another company to run the business then a corporate trust to own its shares?

I must be missing something.

Click to expand...

TherThere may be a few reasons

1. Licensing. E.g incorporated legal practice in now.

2. More than 1 family involved

3. Ability to bring I outsiders later. Hard to sell 20% of a discretionary trust but easy to sell shares.

Terry_w said:

What about wages?

If people are working for a trust as a business and not drawing any wages this is underremunation and has asset protection consequences. There may also be tax issues.

What changes occured in 09?

Click to expand...

There WILL be tax issues.
1. Trust cant pay wages to "beneficiaries". (Sort of !) Akin to partnerships paying wages to a partner. ATO deny deduction then assess 47% tax on trustee for undistributed income + penalties.
2. Trust distributiosn likely partially (or for those who dont know 100%) assessable as wages for workers comp.
3. No deductions for super ?

Bucket companies "dont work"...Tax risks are enormous and in any case uplift tax on dividend income creates a final marginal rate HIGHER than 47%.

Terry_w said:

TherThere may be a few reasons

1. Licensing. E.g incorporated legal practice in now.

2. More than 1 family involved

3. Ability to bring I outsiders later. Hard to sell 20% of a discretionary trust but easy to sell shares.

Click to expand...

Unit trust can be VERY effective for changes to "partners" without duty problems. That and NEVER registering an company in NSW !!!!! Companies have some value shifting problems + stamp duty valuation issues (OSR are bandits)

Class discretionary trust can be an alternative for a two family business too. Its effectively same as a unit trust running busienss and each family gets a fixed share of income. This then flows in a discretionary manner to respective beneficiaries. Seen it used a bit for some franchises like pizza hut and others.

All issues basically come back to one issue - PERSONAL NEEDS = PERSONAL ADVICE by qualified persons. Legal, tax etc must all be factored in.

For 2 people opening a new business with uneven proportions, is it best to use a company and give the founders shares or a unit trust and give them units? In both cases the units / shares can be held in another entity for safe keeping.

D.T. said:

For 2 people opening a new business with uneven proportions, is it best to use a company and give the founders shares or a unit trust and give them units? In both cases the units / shares can be held in another entity for safe keeping.

Click to expand...

How long is a length of string ??

Co issues - Liability risk, easy to liquidate, can "grow up" and become public listed, adding shareholders in some states may mean its dutiable, value shifting rules, ASIC formalities and potential offences under Corps Act, voting ? deadlock ? Directors liability (Directors Penalty Notice, insolvent trading), Co name is reserved nationally, Co can sue and be sued, prospectus in some cases ?, Company can have court judgements against it, valuation problems, etc....

Unit Trust - Fixed % can be changed, valuation should always be addressed in deed (warning !! most FAIL), does deed provide for exit or new unit valuation basis that is fair ?,trust losses remain in trust, profit MUST be shared in same % as units, easy to add unit holders, easy to change unit holders, Trustee of UT should be a company, who are Directors to be, deadlock decisions?

Class Trust - Similar to a UT but with each "parties" fixed share they can distribute akin to a discretionary trust. Problem is changes to the fixed %.

Disc Trust - Problem is neither have a fixed entitlement and appointor can hijack the trust and one party may lose entitlements.

Questions:
- Expected profits, losses ?
- Residency of parties
- Might parteis want to interpose other family eg wife ?
- What type of busienss ? Risks ?
- Business names ? Ownership of Intellectual property
- Assets of Business ?? No property in the same structure as trading.
- What is the position if a buyer offers a high price later ? Is it a good tax structure ?
- What is the position if business gets sued ? Liablity risks.

Personal advice required for all of reasons above and many many more.

evan1875 said:

Halcior,

Can you please explain that why there is a problem now with this set up?

I have something very similar.

Click to expand...

Evan,

My understanding is that the problem arises if you need to carry over any additional profit from year to year beyond the $180k per person. Probably not a problem for most but still something I would like to understand.

Previously you could pay additional profit into the bucket company (and perhaps you still can) but I was led to believe that the alternate structure that I suggested earlier is now preferred.

Profits equal to the $180k per person (or your preferred amount) are distributed by way of dividend from the trading company to the trust who then distributes income to the beneficiaries. Any additional profits can simply be retained in the trading company and not distributed by way of dividend to the trust.

evan1875 said:

I have a family trust controlled by a corporate trustee running my business.

I work for the trust and get paid a market rate salary. PAYG tax and super included as well. Proper employment contract drawn up.

All business income and expenditure runs through a single account and any profit is distributed to beneficiaries. Wife, kids, no bucket company yet. The distribution of profit is done before end of financial year. We aim for 180K gross taxable per person.

Why do you need another company to run the business then a corporate trust to own its shares?

I must be missing something.

Click to expand...

Perhaps I needn't concern myself with anything more complicated than the basic family trust w/ corporate trustee structure until the need arises. I was just interested to know what people typically used.

halcior said:

Evan,

My understanding is that the problem arises if you need to carry over any additional profit from year to year beyond the $180k per person. Probably not a problem for most but still something I would like to understand.

Previously you could pay additional profit into the bucket company (and perhaps you still can) but I was led to believe that the alternate structure that I suggested earlier is now preferred.

Profits equal to the $180k per person (or your preferred amount) are distributed by way of dividend from the trading company to the trust who then distributes income to the beneficiaries. Any additional profits can simply be retained in the trading company and not distributed by way of dividend to the trust.

Click to expand...

Trusts cannot retain income (without trustee paying top tax rate) so with either structure you would have the same issues - may need to retain income in a company at some point. same problems - how to get at that money.

Lets not forget Personal Services Income rules if you plan on using a structure. Even if you pass those, the ATO can still use their Anti Avoidance rules if they believe you are splitting income with others that is not justified by the work they perform.

Terry_w said:

Trusts cannot retain income (without trustee paying top tax rate) so with either structure you would have the same issues - may need to retain income in a company at some point. same problems - how to get at that money.

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As these appear to be the typical SME business structures used obviously you can get at that money.