Trust Tax: Division 7A

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  Donaldhump on 19/05/2021 - 21:44

  +2

  What did your lawyer and account say

  • 

    [Deactivated] on 20/05/2021 - 12:43

    Ozbargain lawyer and accountant said: Donaldhump "What did your lawyer and account say"

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  mskeggs on 19/05/2021 - 21:57

  +3

  Assuming you are making the company a beneficiary so you can distribute income from the trust to it and pay company tax, rather than than taking it as a personal beneficiary with a higher rate?
  The money is then in the company tax paid, and can be distributed as a franked dividend (or director’s pay, for example) or otherwise used for company expenses.

  The trust does not pay tax under this scenario. There is no benefit to the trust for the distribution, as distributions are taxed as recipient (the company) income.

  Assuming you mean the company makes a loan to the trust, any interest the trust pays is an expense, reducing its income (but appearing as income for the company).

  I don’t think either of these arrangements are optimal.
  Some ideas: do you have a potential beneficiary who pays little/no tax (an adult child or retired relative?). It is good practice to make the list of possible beneficiaries large, so the trust has maximum flexibility (if somebody became unemployed, for example).

  Can the company have a board of directors, some of whom might be made redundant in future, getting a tax advantaged redundancy payout that is an expense to the company?

  Can the arrangements between the company and trust include loans and repayments that allow for income outside both to be timed to take advantage of beneficiaries who might have low income years, now of in the future?

  I’m not an accountant, but I think these are some of the main ways these structures can be used.

  • 

    tunzafun001 on 20/05/2021 - 01:04

    Good post, now I know why these CEOs are getting huge severance/ redundancy payouts.

    On a simpler note. We have just had our first baby and my partner won't be working for a year. Can I share my taxable income with her somehow?

    • 

      spal on 20/05/2021 - 09:58

      Only way you can share that I see would be salary sacrifice into your partners super. You will pay less tax, or into their super from you after tax income, and government makes co-contribution, if they earned within the threshold limit in the relevant financial year.

    • 

      Seraphin7 on 20/05/2021 - 11:21

      On a simpler note. We have just had our first baby and my partner won't be working for a year. Can I share my taxable income with her somehow?

      As a basic PAYG worker, no.

      This is an area of the tax law that, in my opinion, should be changed. The tax law should allow for family tax returns (at least between spouses), where in very simplistic terms the tax brackets are doubled, to provide a direct tax benefit to families in scenarios such as this one.

      Alternatively, individuals should be able to have their income averaged out over (say) five years such that having a year out would result in a significant tax saving.

      • 

        tunzafun001 on 20/05/2021 - 14:54

        Interesting… Do you mean you don't file a tax return for 5 years (as long as you are guaranteed a return, would want to do this if you owed $$).

        • 

          Seraphin7 on 20/05/2021 - 15:19

          @tunzafun001: No, you would still need to do one every five years, but effectively it averages out your income over the last five years.

          In practical terms, multiply the tax brackets by five, look at your income going back over the last five years and calculate tax accordingly.

          For people with stable income, it will make no practical difference.

          For people who have time out (for parental leave or other reasons), or who otherwise have income that can be a bit choppy, they get some tax benefit … for example they "normally" make $100k p.a., but have a year out, they would be taxed effectively at 5 x $80k, rather than 4 x $100k that will result in lower tax over that period.

          Equally, for those who have some sort of one off income (such as an asset sale), they're not taxed to the eyeballs by having this massive income drop in a single year, but can smooth it over five … using the above, the person who makes $100k p.a. doesn't suddenly have their $200k asset sale/CGT event drop in a single year, but it would be averaged out to be effectively taxed at $140k p.a. over that period.

          Yes, there are many other permutations and individual scenarios, etc. that would need to be worked through and considered, but particularly in trying to address the financial burden a new child can have on a family, this might be another way to provide families with greater choice in their approach in these early years.

          • 

            tunzafun001 on 22/05/2021 - 11:46

            @Seraphin7: Well…that's freaky, you have just about nailed my current scenario to the $. Currently on reduced pay, partner on no pay (both gov workers with a bub), had a negatively geared investment property over that time. Now have it on the market. I haven't lodged a return since 2017. She is up to date (don't know if you can make amendments). Guess you can as the gov over paid me alledgedly in 2007 and took it back in 2017, then someone went to court and we all got half of it back in 2018. I have always done my own tax (was very proficient with Etax, but the new MY Gov method was a little different). How would I go about using this averaging it all out over the last 5 years method?

            Cheers for the help.

            • 

              Seraphin7 on 22/05/2021 - 15:23

              @tunzafun001:

              How would I go about using this averaging it all out over the last 5 years method?

              Unfortunately you can't.

              This is a suggestion for an amendment to the tax laws to help people in precisely your situation. Hopefully something along these lines is introduced in the future!

• 

  kyle on 19/05/2021 - 21:58

  +1

  Who is the shareholder of the company though? If it's an individual on a high tax bracket you'll end up paying top up tax after franking credits.

  If the shareholder is the same trust, you may have a circular distribution issue.

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  plmko on 19/05/2021 - 23:58

  Lmao

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  donbot on 20/05/2021 - 08:54

  +2

  Clarification on ozb of one of the most complex areas of tax law as it relates to company/trust structures? Now I've seen everything.

  You assume the trust is using the loaned funds for a deductible purpose… yet have you and your brother as arrows out of the trust - which I assume is where the loaned funds into the trust have gone (possibly via a loan out to you both?). Not sure how deductible a debit loan out of a trust to individuals is… nor how it really achieves anything as now the trust has no cash to repay the loan to the Pty Ltd company.

  Whats the overall aim of this?

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  CrowReally on 20/05/2021 - 08:56

  +2

  Not tax advice, but this is what happens: https://www.ato.gov.au/business/private-company-benefits---d…

  Trust declares income to company, company puts income in its tax return.
  Cash never leaves trust (now it's an Unpaid Present Entitlement), loan agreement is set up so that the cash 'loaned' by the company to the trust is now on Div7A terms.

  Speak to your accountant for more.

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  Bartemaus on 20/05/2021 - 09:52

  +1

  The additional compliance costs you'll pay each year will probably negate the potential tax benefit unless there is big $$ involved.
  If you are taking the money personally then the tax isn't necessarily saved,it's delayed.

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  spal on 20/05/2021 - 10:07

  This is lot of work for minimal advantage. Most people would generally do it for asset protection purposes. Unearned income distribution to minors beyond a threshold, which is very low, is taxed at highest tax rates. Dividend distributions are taxed as income in the hands of the receiptient. There is no advantage, unless you are retired and have no taxable income.
  You probably need to do some more research into this, and then speak with an advisor. Tax arrangements shouldn’t be the only reason to run a business. Probably best to run a business to create wealth. There concessional treatment on capital gains incomes and sale of businesses.

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  bemybubble on 20/05/2021 - 11:36

  Will try and keep this short and succinct and as simplified as possible.

  Main ways to get out profit from a company (main, not only) is either wages or dividends. This way the ultimate taxing point lies with an individual. If it is simply drawn out and not charactised as a wage or dividend then it's effectively a loan.

  Under Div7a if you do not pay that loan back then the law forces it to the person whom borrowed it as an unfranked 'deemed' dividend. So in other words, they force the issue of a dividend against the person who borrowed the money. The only way not to force the dividend issue is to legitimise the loan in the form of a loan agreement. Loan terms and interest rate are determined by the ATO (7 years unsecured or 25 secured).

  Now - when a trust makes a distribution of profit to a beneficiary, the trust is promising that $ amount as a legal entitlement to that person or entity (i.e. company). If the trust makes a distribution of profit to a company (and doesn't give it the cash), then it triggers Div7a no different to the abovementioned explanation. Why? Because had the trust given the cash to the company as it should have, the company has effectively on-lent that to an associate without it being a wage or dividend.

  The thing is, in order to have a compliant, the company needs to charge the trust interest. However, based on my logic, if the trust pays interest to the company, which is taxed at 30%, won't the trust receive a corresponding tax benefit? Essentially making the arrangement an interest-free loan?

  In most cases i've seen - yes. Lets say for example your trust made $100k profit and distributed 100% to the company, and the reason why the trust retained the cash was to go out and buy a piece of equipment or payout business debts to the trust, then the purpose of that loan was directly tied into the business and becomes a standard deduction. So effectively the company declares the interest and the trust claims the interest thus nullifying it.

  *note that this is not advice but general info only