Ask Ban Tacs Question
Facts
* I setup a Trust and Corporate Trustee for our family back in 2009 shortly after our first son was born.
* My wife and I are the (only) two directors of the Corporate Trustee.
* I’ve not had any updates made to the Trust Deed since.
* We made two—highly speculative, illiquid—private equity investments in the early years of the Trust’s life. One is moribund with minimal prospect of return-of-capital, while the other may return some fraction in the dollar.
* Those investments have not generated any income.
* Since set-up the Trust has not derived income in any tax year; correspondingly the Trust has not yet lodged any tax return in any tax year.
* However, I have just commenced trading a Personal Services Business (PSB), contracting out of the Trust and to be run as a Family Business.
* I have sought and obtained a PSB determination via the MyGov/ATO portal.
* We set up a bank account in the name of the Trust shortly after setting it up in 2009, but it has sat at $0 balance since then.
* We recently transferred in to the Trust some funds into it to pay start-up expenses for the PSB
Questions
* Is it a problem that when making those early investments—although we originally applied for and have the shareholding in the Trust’s name—we paid for them by simply transferring the cash from our joint (personal) bank account, rather than by first funding/‘gifting?’ the Trust bank account from our joint bank account and then making the payments for the investments from that Trust bank account? If the problem is that technically we hold them in 50%/50% personal share rather than the Trust holding them, is it possible to rectify this somehow? If there are costs it might not be worth doing, given these are most likely capital losses only, but it would be good to know our options.
* In 2011 we had another son—is it necessary to explicitly name him in the Trust doc or are we ok with just the cover-all provisions of Trust law extending to family? Especially given the cost of amending the Trust document?
* Are there other good reasons—generic reasons such as changes in Trust law or case law outcomes in the intervening time, etc.—that might make a wider review of our Trust Deed doc advisable, given its age? Is that something that Bantacs offers as a service? If so, is there a set fee? Are there other costs then to actually implementing any advised changes?
Bank account ‘hygiene’:
* I saw mention recently of Settled sum needing to be the first entry in ‘the accounts’ for the Trust in order to have a valid trust. Not sure if that meant it needs to be reflected as a physical cash deposit too? In our case, the Settled sum back in 2009 was just $1 and that was just a physical coin. Can’t we just note it in the ledger/balance sheet but not necessarily as a transaction in the bank account?
* To date we have paid some expenses, where due to not having a distinct credit-card in the name of the Trust’ rather we have simply used personal credit cards and/or a business credit card that I have had as a sole trader in prior income years. Presumably best-practice is to get the Trust its own cards etc., but until the banks are happy to look at the Trust/Trustee as its own credit entity, what’s the best way to reflect in the Trust accounts the personally-pad-for expenses?
Seeking to understand “drawings” vs. “distributions” vs. other?:
* Is the right way to think of a drawing as a kind of informal distribution?
* Is it right that they are reversible within the tax year but not beyond it? Ie. can you draw out but then put drawings back in to the Trust—at least within the any given tax year—without unpalatable tax consequences? Eg. is it kosher to pull out surplus Trust funds to have sitting in our joint mortgage offset account during the tax year, then put back in just prior to tax year-end to distribute in a different proportion?
* When doing this gifting/funding in to the Trust—presumably this goes to the ‘corpus’ of the Trust and does not get taxed again when it is eventually paid out…What is the term for that kind of pay out and how does it need to be recorded so that receiver (beneficiary) does not wear it as taxable income?
* When doing this gifting/funding in to the Trust – is it necessary/possible to show that it is intended as corpus for the trading PSB’s expenses as opposed to intended for capital investments? Should it be recorded against a separate ‘corpus’ account on the balance sheet or something similar? And, does it remain tied to the individual(s) that paid it in…as in separate sub-ledgers according to who paid it in—such that it is able to be paid back out to that individual beneficiary at any time? Or, is there no such thing and instead any such funds, once gifted in, are simply regarded as common-pool Trust funds and any corpus pay-outs are subject to trustee discretion in the same way as income from year-to-year?
* We will employ our sons to do low-level clerical tasks appropriate to their age, and to build and maintain the company website. This will likely be employment only from time-to-time. What’s the appropriate characterisation for this…casual employment then unemployment, then casual employment again as/when required? Do we have to do PAYG withholding for them if they their total payments over the year will be (well) within the tax-free threshold? Presumably we have to pay them SG which is fine—worth doing all that to ensure their active income is properly reflected as such come tax-time.
* We will plan to distribute passive income to them to their $416 limits—any complication with that given they are ALSO employees?
* SG notwithstanding, we want to make discretionary (‘reportable’) Super payments to all 4x family members. Presumably not just the SG, but ALSO the discretionary Super payments are tax-deductible to the PSB business?
* For myself and my wife—is it sufficient that we be directors of the Corporate Trustee in order that the business is able to make discretionary (‘reportable’) Super payments to us, or do we ALSO need to be formally employees of the trading PSB business.
Answer
First up one of you should resign as director, no point in 100% of the family assets being up for grabs if you do something wrong. As long as you both are shareholders the non director can vote themselves in if the director dies or is unable to act.
Here is my blog on the coronavirus stimulus, https://bantacs.com.au/Jblog/coronavirus-stimulus-package/#more-466 there may be something in it for you. I do not have enough details here to know if you could qualify, such as whether you have lodged a BAS before 12th March, 2020. You sound like you are used to working things out for yourself. It will only take 1/2hr to read the blog, worth thinking about.
Hopefully this blog will help you see the benefits of having an ongoing relationship with an Accountant. It takes a life time to build the sort of knowledge needed to answer the questions you have asked and you need to spend your lifetime concentrating on your profession. That is why I don’t fiddle with my web site I just send the material I have written to my computer guru and maximise my time to do what I am trained to do in the most efficient way. Even if I answer all your questions things are constantly changing, how are you going to keep abreast of this.
To update the deed is a solicitors job. Generally speaking you youngest son should be included as a beneficary by reference to you ie you named as a primary beneficiary and you children being included due to their relationship to you. Have a look at the deed and see what it says about who the beneficiaries and primary beneficiaries are. Of recent years there have been many changes to state and federal laws that affect the trust deed, these need to be considered by a lawyer in your state. From a tax point of view if there are any carried forward losses a family trust election will need to be made in order to utilise them and that effects the beneficiaries. Further, a radical change to the beneficiaries can cause a re settlement of the trust. Consider that an off the shelf trust deed only costs a few hundred dollars it might be worth just getting the latest version compared with asking a solicitor to read through yours and make recommendations. Your company can still be the trustee. Of course you can’t move across any capital or revenue losses you may have in the old trust so you may keep that open anyway. Your company can be trustee for both trusts.
You can lend the trust money and it can pay you back. That is a simple loan as opposed to corpus or gifts. In the balance sheet the loan is recorded as a liability where as the corpus or gifts are equity. These gifts can be distributed back to you again depending on the trust deed but as they came in as gifts the original giver is not necessarily the person the funds can go back out to. When it comes to the loans the lender would be named. The loan account for each individual would be where you would record the normal comings and goings. When the trust makes a profit it needs to distribute it all out to the beneficiaries else the trust has to pay tax on it at the maximum tax rate. The individuals can lend it back to the trust but it must go in their tax returns and they are the ones that pay the tax on it. It is not the coming and goings of the cash that determine what tax the beneficiaries pay. It is the calculation of the trust profit and the percentage that they are entitled to, according to a minute made before the end of each year.
If the settled sum no longer exists the trust no longer exists. It is nice to see it go into the bank account as an EFT from the settlors account bank account. That way there can be no doubt cast over the settlement of the trust. The risk, if there is going to be very little activity on the bank account, is that a bank fee could come along and wipe it out completely, thus bringing the trust to an end. This is why some people prefer to keep the settled funds stuck to the trust deed.
Have you checked who the appointor of the deed is. It is probably you and you need to make provision for the transfer of this power in your will. Another reason to visit a solicitor.
Askbantacs is only answering one question at a time. You have asked several so I will just briefly touch on them. The bottom line is don’t try this at home.
From an administration point of view having a separate credit card for the business transactions is a good idea. Don’t worry too much about trying to get it in the trust’s name as the banks can be difficult. The trust is entitled to reimburse you for expenses you incurred on its behalf and it can claim them as a tax deduction and the GST input credit because you are an officer of the business.
The idea of having to make super contributions through an employer arrangement ie the trust, is no longer that important as you are now allowed to claim a tax deduction in your personal tax return for contributions you make for yourself. The advantage of doing so in your name is you can wait until you do your personal tax return and calculate your taxable income before you decide what portion of the contribution you will claim as a tax deduction. Tax deducted super contributions are taxed at 15% going into the fund so you want to make sure you need the tax deduction before you expose yourself to the tax.
The investments are in the trust’s name so that is where any future capital losses will go. It is just a matter of drawing up the balance sheet to recognise how the funds came about.
Please don’t try and do this stuff yourself. It is my personal belief that Treasury realised a long time ago it is too hard to catch out taxpayers who are well advised. It is much easier to catch Mum and Dads who unwhittingly fall into traps because they think they are being frugal by not paying for advice. On several occasions I have saved people hundreds of thousands of dollars in short conversations. Pointing to things they just weren’t aware of that apply to common family arrangements.
I have only touched the surface here. Please get advice.
