Hello,
I am just wondering how you would go about re-investing profits under a trust structure.
Example:
Say you invested $15,000 from the trust as a deposit on a property you were going to wrap which yields $400 a month profit plus $20,000 when the buyer refinances.
Say the buyer refinances after 12 months and you have $24,800 profit. If you don’t want to distribute that profit to the beneficiaries but would rather re-invest it how do you do so (as the trust itself will taxed on the highest marginal rate of 47% if it doesn’t distribute the profits)?
Hey there Buck,
To the best of my knowledge you are correct in what you say. If a trust does not distribute then it pays top matginal rate. There may be a few angles here but best to talk to an accountant.Enjoy
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Albert EinsteinI had a think about this last night and I believe that you can act as though you have distributed the profit to any of the beneficiaries in order to work out the tax due e.g. may pretend that you have distributed it to a limited company where the tax rate is 30%. Therefore the remaining 70% you can re-invest.
The company would then get an IOU for the 70% you have re-invested, and would receive the actual cash at a later date. Sound reasonable to everybody?
It’s ok to make directors salaries to reduce the profits. However, do take into consideration your PAYG obligations esp if you need to submit a quarterly statement. However, can’t see how buying a new car can reduce the profits as a car is considered a capital item. Then there’s FBT to consider as well. Much too complicated.
I seem to recall reading somewhere that a profit made by a trust that is not distributed to beneficiaries, may be left in there and not taxed if it can be demonstrated that the trust intends to re-invest that profit.
Maybe I am mistaken but it might be worth looking into.
Cheers,
Mathew.
Thanks for all your help everybody especially Michael.[
]I operate a discretionary family trust. It is my understanding that any trust profit must be distributed in full each year, otherwise some 47% tax will be levied. I’m not sure if the undistributed profits can subsequently be paid as franked distributions.
I don’t think it is correct that profits on sale of assets can be re-invested in new assets to avoid tax liability, since profits are revenue and asset purchases are not.
There are also serious traps if a beneficiary leaves their distribution in the trust as a “loan” or puts cash into the trust to aid cash flow. The tax office will regard the repayment of these “loans” as further distributions and will tax them in the hands of the beneficiary – unless there is full “commercial” loan documentation signed, sealed and delivered at the time of the transaction.
I will shortly be establishing a Property Trust as distinct from a Discretionary or Family Trust, for the purposes of investing in property. I have yet to establish if the rules are different regarding profit distribution, but I expect that they will be similar to Company rules. Investment in the trust will be by unit purchase so retained profits will be reflected in higher unit prices. Hopefully this structure can be created to provide protection of personal assets and limitation of liabilities, etc.
How about distributing any profit to a company, which has made a say share trading loss, can the distribution be offset against the loss?
Hi Regina.
Yes, one of the benefits of the discretionary trust it the ability to distribute profits to any entity.You can therefore make a distribution to your loss making company (no use against capital loss, though), your church, etc. You can distribute to me as well (TFN supplied on request!!!!![
])I do have an investment company which receives distributions from the trust, and pays 30% tax. This is better than paying a high personal tax rate and the money is there to pay fully franked dividends to myself if I have a bad year or when I retire.
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