It is now 4 months since the trustee tax rate was increased and you may still be considering alternative structures to hold your investments. This is a valid question to ask and one we are working through with clients.
There are a few issues to consider.
Conceptually, a 39% flat tax on unallocated income heightens the risk of over taxation for low income earning beneficiaries.
To make a simplified comparison, a company could make a profit and expect to be taxed at 28%. The lower corporate rate might persuade some trustees to consider restructuring.
On the surface this appears like an 11% tax break. But corporate tax is not necessarily a final tax. Where a company distribution is assessable income to the person, it is taxed for a second time at the recipient’s personal tax rate. This has the potential to erode the benefit the corporate rate might provide - albeit with some timing benefits.
On the other side, changing to a corporate structure also comes with its own issues to consider:
- a transfer of income-earning trust assets to a company must be structured to ensure beneficiary interests are put first
- operating both a trust and a company might increase compliance depending on the experience of trustees, directors and shareholders
- private use of company assets is subject to the mixed-use-assets rules and dividend rules
- company affairs can be more in the public eye
- different tax regimes can apply to company compared with a trust
If you have been considering making a change or have any further questions, please reach out to one of the team.