How to structure trading accounts to minimise tax – Trusts, Corporations?

Considering your treated on revenue account rather than capital, ie no capital gains discount. For mine, I would look at doing the trading in a company, with the shares of the company owned by a family trust or perhaps 2 family trusts (one yours and one your other family member).

In laymans terms the major difference btw a Trust and a Company is a Trust will allow you to take advantage of Capital Gains discounts whereas a Company won’t, but since you won’t have CGT discounts that takes away the advantage of a Trust over a Company.

A company allows you to retain profits in the company and caps the tax rate at 30%, maybe down to 27.5% if turnover is under $10m. The ATO are planning to reduce it down to 25% over the next 10 yrs for all businesses. If you are looking to keep profits in the business and compound profits over long term this is advantageous to paying tax on profits at the top marginal rate in your personal name. However if you wish to take profits out for personal use, whatever you take out will be added to your other personal income and taxed at marginal rates. So in effect it is a tax deferral tool until you wish to take money out of the company for personal use. You can choose how much and when you take it out. This is usually done in the way of the company paying a dividend. A dividend must be paid in the ratio of who owns the shares, and you also get a tax credit for any tax the company has paid, called a franking credit. So if the shares are owned 50-50 with you (either individual or via trust) and your family member, when dividends are paid out it has to be done 50-50, if ownership is 75-25 when dividends are paid it has to be paid in same proportion.

If shares in the company are owned via a family/discretionary trust, then when the company pays a dividend to the trust, the trustee has discretion on where those funds are distributed, and can distribute them to take advantage of personal income tax rates, there is no ratio/prorata rules, one year the trustee could distribute 50-50, another year it could be 100-0, the trustee has total discretion unlike a company dividend. If you are single it probably doesn’t make much difference, but if you have a spouse it will save quite a bit in tax. Assume just you receives a $180k dividend from company to trust that flows to you, tax on $180k would be approx $57,832, whereas if you were able to split it 50-50 with spouse so 90k taxable income each, tax would be approx $22,732 x 2 = $45,464 a tax saving of approx $13k.

A unit trust is owned by unit holders, somewhat similar to shares in a company, so the units can be owned 50-50, 60-40 whatever you decide with your family member. When a Unit trust makes a distribution it also has to be done in same proportion as those that own units, there is no discretion like a family/discretionary trust. As with all trusts all profits must be distributed or they get taxed at top marginal rates. One may use a Unit Trust in preference to a company if the activities of the trust may make it eligible for a CGT discount in the future, if there aren’t likely to be CGT discounts in future I would say a Company would outweigh the benefits of a Unit Trust.

Shares of the company are an asset, so if a shareholder was to be sued, they are quiet likely up for grabs. So if you own the shares individually, there would be no more asset protection than doing it all in your own name. If the shares are owned by a trust it adds a layer of protection, for if you are sued personally/professionally or your family member is sued it wouldn’t matter as you don’t own the shares, the trust does. And nobody owns the trust so if all it does is own shares in a company that carries on a trading business then it has pretty much no chance of being sued.

A trust has to distribute all trust profits each year otherwise tax profits get taxed at highest marginal rate, whereas a company can retain profits and pay tax at company tax rate, currently 27.5 to 30%, to distribute at a future date for personal use.

As I see it they are the major advantages of the above structure you would also need to consider how you are going to get funds into the company, normally via a loan from you/family member but this should be documented with a loan agreement. Also need to consider what would happen if one of you dies or becomes incapacitated, who takes over the entity to disburse funds to your will/family members etc. Also how you calculate who is entitled to what profit, say you both put $100k in each, so you split profits 50-50 which is easy. But say 2-5 years down the track the account has grown from $200k to $400k and your family member wants to take out $50k to spend on a car/holiday/boat but you don’t. Now you have a pool of $350k, 200 yours and 150 your family members as the fund grows to $500k how do you calculate your portion and there portion…it may become quite complicated.

Each entity would cost roughly $1,200 ish to setup varies amongt professionals. You can do online for much cheaper but if you don’t know much about them that would be silly.

Ongoing tax returns/accounts anywhere between $300 and $1,500 per entity per year in accounting fees depending on professional.

One really needs to do a cost to benefit analysis, calculate the tax savings/asset protection benefits to setup/ongoing fees to determine if it is worth it.

Food for thought, no doubt you will seek advice from professionals.