Corporate Beneficiaries – an effective tax strategy?

family trust

Today’s strategy is one targeted specifically at business owners who operate a successful and profitable business through a discretionary or family trust. Operating the business through a family trust with a corporate trustee is one of the most common structures for family businesses. When used to it’s greatest strength this structure can provide a great deal of tax effectiveness (refer to our recent article on Trustee Resolutions) and maintain asset protection for non business assets.

One of the key tax requirements of a discretionary trust is that any money not distributed to nominated beneficiaries will attract tax equal to the highest tax rate payable by individuals. Therefore it would only be in rare circumstances that any family would consciously decide against distributing all the trust profits each financial year. The problem here can be that if a business is performing well, if an individual taxpayers personal taxable income exceeds $80,000 the marginal tax rate is 39% including medicare levy (and even higher if the taxpayer has a HECS liability or doesn’t have Private Health Insurance).

We have a number of successful business owners who would like to take a proportion of their business profits and invest these in wealth creation assets. However sometimes this can trigger higher personal income which in turn attracts higher taxation obligations. An obvious alternate strategy is to make lump sum superannuation contributions which can be very tax effective. The two potential limitations of this strategy are the preservation rules (where any taxpayer is limited from accessing the funds for a number of years) and the contribution caps (limits on the amount of tax deductible contributions that can be made in any year).

So, in working through this with a number of clients who have this situation we have developed a strategy known as “Corporate Beneficiary Solutions”. In a nutshell this involves setting up a Company that will act as an Investment Company and generally is owned by a Discretionary Investment Trust to increase the tax effectiveness of the strategy. Annually, when making the trust distribution from the business trust a nominated amount will be distributed to the Investment Company. This company then uses these funds to build an investment portfolio (whether it be property, shares or other assets) to create wealth for the family.

The tax is capped at the company tax rate (30% for 2014/15 and then 28.50% for the 2015/16 year per the Budget proposals) on all income and capital growth received by the company. Unlike superannuation funds, in Corporate Beneficiary Solutions, there are no preservation rules, contribution caps or limits on borrowing arrangements that the company can enter into. The price paid for this freedom is the higher tax rates of companies compared to superannuation funds and limitations on some capital gains tax concessions.

When the taxpayer wants to access funds from the Investment Company this is done by way of Fully Franked Dividend to the Discretionary Investment Trust so the prior tax paid is a benefit that can be streamed through the family group.

As you can tell, this strategy is not for everyone and advice prior to entering such a structure is an absolute necessity. For those who have been able to put this plan in place, there can be significant financial benefits in both the short and long term but we do reiterate specific advice is critical prior to establishing any structures.

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