A discretionary trust is mostly established for family or entity members, however, a combination of discretionary trusts are also used by private companies. The many advantages from this allow them to get the corporate entity which means limited liability and a lower tax rate, as well as the main advantages through the trust. Advantages from trusts include asset protection, flexibility to distributions, and access to the 50% CGT discount (if the asset/s have been held for more than 12 months). The trustee also has the power to add/remove beneficiaries and has the discretion to distribute income and capital to a range of beneficiaries. Mostly these powers are used to supplement lower-income beneficiaries and any unused credits are refundable in beneficiaries hands.
However, to qualify for the tax offset against future trust income – it must satisfy trust loss recoupment rules, and cannot offset against the personal income of its beneficiaries. As discretionary trusts are known to be family trusts, a trust that qualifies can recoup past/current year losses and claim debt deductions. Despite this, a trustee is liable for family trust distribution tax if any distributions are made to individuals other than family members.
A bucket company is a term applied to a company structuring their trust in a particular way as to allow the company (beneficiary) to be assessed on its shares of the net income at the applicable corporate tax rate. Meaning that the company is set up to be the beneficiary to a trust. It forms a good structure to hold long-term investments. The company will be used as a bucket to collect money (profits) into – to reduce tax. This allows them to cap the tax at the corporate tax rate. The same amount will need to be distributed to the companies bank account before the tax return is lodged.
The company may make payments in the form on a dividend (already taxed at company tax rate) to its shareholders (if they want to get money out of the company), here the shareholder will receive a franking credit on tax already paid. The dividends must be distributed according to the shareholders’ percentage. Holding these company shares in a separate trust would be a smart way to allow the dividends to be distributed in the most tax-effective way and also be a form of asset protection.
Note that for investments, companies are not eligible for the 50% CGT discount, while trusts and individuals can access a 50% CGT discount if an asset is held for more than 12 months. Note that for-profits, the profits are taxed at the corporate rate, however, if you have distributed to a company to save tax, it is likely this will still be under your own personal tax rate.
A chain of trusts, the trustee of the main trust is beneficiary to another trust/s. Income that is generated can be distributed from the head trust to the trustee of the sub-trust/s. See 95B and 99E in ITAA 1936.
A partnership of trusts, all partners are trustees. The ATO is currently assessing the different arrangements in which professionals are involved through partnerships.
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