COMPANIES – FREQUENTLY ASKED QUESTIONS
What is a Company?
A company is a separate legal entity from the owners. It can sue and be sued in its own name separate from the person who owns it. It has limited liability for its debts. A company can either be a public company like BHP or AMP (Ltd) or a private company (Pty Ltd).
A company is run by it’s directors. It is owned by it’s shareholders.
Can you give me an Example?
Let’s assume that John Smith sets up Smith Pty Ltd. John Smith makes himself the director who runs the company. His wife Mary Smith is the shareholder.
John Smith Pty Ltd enters into contracts in its own name. It is liable for the debts. Apart from some exceptions, John Smith is not liable for the debts of the company; only John Smith Pty Ltd is liable for the debts. And Mary Smith is not liable as she is a shareholder and has limited liability, ie. limited to the amount of unpaid amounts owing on her shares.
I have heard that a Company is a great way to Trade Options or Buy Property as tax is limited to 30%. Do you agree?
A company does have some benefits.
- It is a separate legal entity from the owners. This means it can sue and be sued. This gives great protection of your assets held in a company. Because your company is a separate legal entity, if someone successfully sues your company, it does not mean you have to pay the bills. In many cases you will not. It will depend upon whether you breach certain duties under legislation.
- Companies are taxed at 30%. Individuals pay tax up to 48%. You can accumulate profits in a company and pay tax at no more than 30%.
- Companies also allow some income splitting. Depending upon who owns the shares, depends upon who gets the income from the company. You can also issue preference shares to improve things even more.
- Companies can be a trustee for a family trust. This gives an extra level of asset protection for you with your assets.
However, there are some problems with companies. To give three examples:
- Although tax is only 30%, the moment You pay out the profits to shareholders, the shareholders are taxed at their top tax rate. So companies only work if You are accumulating the profits, not if You are paying them out. But we can show You a few techniques to overcome this problem.
- You can’t even loan the money out of Your company to avoid the high tax rates. People used to do this but the Tax Office has changed the law to stop You doing this. If You loan the money out of Your company, there are strict rules that You have to comply with.
- If You hold assets in Your company, when You sell the assets, You don’t get the capital gains tax concessions. This is a real problem with buying real estate in a company. Companies are not a good structure for real estate.
Ultimately it does depend upon circumstances. Arrange Your Free Initial Chat with our Specialist and we will see if a company will work for You. But in our view, a trust is usually the better way to go to trade the stock market or buy property.
When should I set up a company?
In our view, You should set up a company only in four situations:
- As a corporate trustee for Your discretionary trust.
- To accumulate income. That is, companies are taxed at 30%. Individuals pay tax up to 46.5%. You can accumulate profits in a company and pay tax at no more than 30%. However, as a company can be a beneficiary of a discretionary trust, subject to 3 and 4 below, You should simply set up a trust and a company as a beneficiary of Your discretionary trust.
- If You are a contractor who contracts out Your own personal services for income. For example, if You are an engineering or roofing contractor, You are not allowed to split income through a trust or company. At best You can accumulate income, and even this is dependent upon You receiving not more than 80% of your income from the same client.
- You are required to set up a company due to the nature of the industry You work in. For example, some network marketing companies require their product distributors to use either their own name or a company; a trust is not allowed. Similarly some professions will not allow their members to set up their business structure through a trust.
How much does it cost to set up a Company?
If You purchase the company with a trust, we have package deals for traders and property investors, or for traders and investors who buy multiple structures. Contact our Tax Specialists NOW to receive more information.
Should I set up my Company before Trading or Buying Property?
Most certainly! Once You start doing things a certain way, it becomes harder to change it later on. There are rules about changing Your business structure to avoid tax or stave off creditors. It can be done, but it is more expensive and more risky.
So, contact us NOW and we will get things moving for you!
I already have a Company which I use for my Business. Can I just use that?
Definitely not! If someone sues you in your business, all assets in the company are at risk. You must do your trading in a separate company, otherwise all your trading capital is at risk if you get sued in Your business.
TRUSTS – FREQUENTLY ASKED QUESTIONS
What is a Trust?
A trust in its simple form has a settlor, a trustee, and beneficiaries. The settlor sets up the trust. The trustee manages the trust property (investments, assets, etc.) and pays out any net income for the benefit of the beneficiaries.
Let’s give a simple example of a trust. I transfer my car to You as I am going away for 3 years. During that time, You can drive it, do what You like with it. But after 3 years, You must transfer the car to my mother. We have a legal agreement. This is a trust. I am the settlor (as I created the trust), You are the trustee (as you are holding the car on trust for my mother) and my mother is the beneficiary (as she is beneficially entitled to the car and could sue you if You decide not to give the car to her down the track in 3 years).
However, at Wealth Safe, we use family discretionary trusts. These are similar to the above but the characteristics are slightly different. To explain, the Settlor is an unrelated party, the Trustee is a company or Yourself, and the Beneficiaries are all Your family members, companies, trusts and charities. As the Trustee You can distribute the profits and the trust capital to whoever You want to, and in what proportions You want to distribute, that is, on a discretionary basis, as none of the Beneficiaries have a fixed entitlement or interest in the trust funds.
Click Here for more information about family trusts, and how they work.
What are the elements of a discretionary trust?
It is fairly involved but to explain the main characters in a discretionary trust:
The Trustee is the legal owner of the trust property and not the beneficial owner. That is, in the car example above, the trustee’s name is on the car registration papers, but legally the trustee does not own the car. The car is held on trust for the beneficiaries. The trustee carries out all transactions of the trust in its own name and must sign all documents for and on behalf of the trust. The trustee’s overriding duty is to obey the terms of the trust deed and to act in the best interests of the beneficiaries.
The Settlor is the person who creates the trust by “settling” the initial sum of money to be held on trust for the beneficiaries. This is usually a nominal amount such as $10 to keep stamp duty to a minimum.
The Trust Fund is all the money and property held in the trust. This includes the settlement sum, accumulated income and any other money and property held by the trustee pursuant to the terms of the trust.
The Beneficiaries are the people (including entities) for whose benefit the trustee holds the trust property. The beneficiaries do not have an interest in the assets of the trust. Beneficiaries are eligible to receive a distribution of income or capital at the trustee’s discretion. For example, in a standard discretionary trust, Fred Smith (as trustee) may hold the money and property on trust for his wife and children (who are the beneficiaries).
The Appointor is the person who calls the shots. The Appointor can hire and fire the Trustees. The Appointor is the really important player in the trust.
The Trust Deed defines the relationship between the trustee and the beneficiaries in a document setting out the rules and terms of the trust.
Some trusts also have a Guardian as well as an Appointor.
Do I need a trust to trade or buy property? Why not use a company?
In our view, there are only four situations where you should set up a company:
- To be a trustee for your discretionary trust;
- To accumulate income with a maximum tax of 30% (without drawing the money from the company; once you withdraw you pay the maximum tax anyway);
- To contract out your personal services for income (eg. you are an engineering or roofing contractor who relies on your personal skill for income); and
- To comply with industry requirements (eg. some network marketing companies require their product distributors to use either their own name or a company; a trust is not allowed).
Why would I set up a Trust?
Apart from the four situations above, trusts are the best structures to do business, especially stock market trading or property investing. Trusts have some wonderful advantages:
- A trust has no set tax rate. You can give the trust profits to the persons or charity who is paying the lowest tax rate. Or if everyone is on the highest tax rate, You can give the profits to Your company.
- Family discretionary trusts have great asset protection. Nobody owns the assets of the trust. The assets are held by the trustee and the trustee decides who gets the profits and who gets the assets.
- Unlike companies, you are entitled to the 50% capital gains tax discount on any assets held for more than 12 months which You sell at a profit. This is a very important advantage for trusts who do hold real estate.
- Unlike companies, You can loan money out of Your family trust. And You have no tax penalties.
Do Trusts have any weaknesses?
Yes, but only two weaknesses:
- You cannot accumulate profits in a trust without paying tax. You must distribute the profits each year. However all You need to do is distribute the excess profits to the company anyway and cap the tax at 30%!
- A serious weakness is trusts which buy heavily negatively geared property. Any losses from negative gearing cannot be claimed as a deduction but must be carried forward to offset against future income.
Apart from those issues, a trust is the best structure.
Can you give me an Example of how a Trust works?
I set up a trust (as the settlor) with Fred and Mary Smith as trustees. Fred and Mary have 3 children, 2 children under 18 and a 20 year old son (who earns $25,000 per annum).
Fred and Mary put $500,000 into the trust and trade options with it. They make $150,000 profit in the first year.
Fred and Mary can distribute the profit to themselves, to their children, their favourite charity, a family company, or to a mixture of all of them in any proportion they so desire.
For example, assume that Fred earns $100,000 (is on the top marginal rate) and Mary earns nothing. They may distribute as follows:
|Fred||Nil (as he would pay 48.5% tax)|
|Mary||$58,000 (she pays only about 20% tax overall and over $58,000 the tax rate increases to 42%)|
|Son||$33,000 ($58,000 – 25,000, tax capped at 30%)|
|2 minors||$416 each (tax-free, they cannot get more unfortunately as the trust will be hit with penalty tax)|
|Company||$43,678 (the balance to be distributed, tax capped at 30%)|
The tax savings are quite substantial as compared to Fred trading in his own name or even in Mary’s name only.
Do Trusts protect my assets?
Most certainly! Contact us NOW and we will help You set up trusts which will protect Your assets. We have some great structures we can implement immediately to protect Your assets and ensure that if Your business does get sued, Your personal assets remain secure. We even have some incredible techniques to protect Your business goodwill and business assets. For more information,
We also have package deals if You require multiple trusts for business or property buying, or for any other specific purpose. Should I set up my Trust before Trading or Buying Property?
Most certainly! Once You start doing things a certain way, it becomes harder to change it later on. There are rules about changing Your business structure to avoid tax or stave off creditors. It can be done but it is more expensive and more risky. Contact our Tax Specialists to assist You with restructuring NOW
I already have a Trust which I use for my Business. Can I just use that?
Definitely not! If someone sues you in your business, all assets in the trust are at risk. You must do Your trading in a separate trust, otherwise all Your trading capital is at risk if You get sued in Your business.
If You have already started trading in Your business family trust, come and see us immediately and we will arrange a trust split, ie. we “cut” the trust in half to create two separate trusts, with minimal stamp duty and no capital gains tax.
How do I get More Information about Trusts and their Benefits?
Read our blog on the benefits of a trust. Click Here
Or else take advantage of our FREE INITIAL CONSULTATION at Wealth Safe to help you understand our services, and how we can do your tax returns for you and save you THOUSANDS of dollars in Tax to KEEP the MONEY you MAKE.