Are you aware of the tax changes affecting companies and trusts?

There have been a number of significant tax changes recently and it may now be an appropriate time to review and possibly update your group structure if you have a company and a discretionary trust.

You need to be mindful of the following key changes.

The company rate of tax for trading companies with a turnover of less than $50M has fallen over the years from 30% to 25%.

The company rate of tax for non-trading companies remains at 30%.

Current 10 year interest only arrangement involving unpaid trust distributions to a company is likely to be changed to a principal and interest loan under an ATO proposal with respect to Division 7A.

As illustrated below, it may be appropriate to adopt a slightly different tax structure to conduct the affairs of a trading company:

The steps

Interpose a new holding company between the trading company and discretionary trust.

Apply the relevant rollover provisions to negate any taxation implications with the restructure.

Tax rate applicable to the new holding company is 25%.

Dividends are paid to the holding company without attracting any top up tax.

The holding company only pays a dividend to the discretionary trust as and when funds are needed by the individuals.

The advantages

Removal of the 5% top up tax (30 to 25%), by using a Holding company instead of a bucket company, allowing the group to retain more cash to fund its operations and any growth.

Asset protection is maximized by paying prior year profits of the trading company as a dividend to the holding company under a loan back arrangement.

Loans between companies do not attract Division 7A implications, increasing cash flow for the trading company.

The disadvantages

The strategy only works were the directors (mum and dad) do not take excess cash for themselves. If mum and dad take the funds out of the trading company it will force a dividend or Division 7A consequences through the holding company mitigating any benefits that would otherwise be realised by holding the excess funds in the holding company.

The taxation landscape concerning companies and discretionary trusts has changed in recent times and we recommend that business owners obtain the necessary professional advice and update their structure if necessary.

If you have any questions, or need any assistance, please feel free to contact John or Renee.