tax question/strategy

[Deej]

if a trust buys a warehouse on credit, for say $500k, then rents it out to a company with the same director/shareholder as the trust, then is it possible for the trust at the end of any given financial year to automatically raise the rent for the warehouse to some massive amount that would co-incide with whatever the profit figures were for that financial year for the company?

The company would suddenly have a huge expense listed in the books that would offset any profit shown for the financial year. As long as the trust continued to pay off the debt i'm thinking that somewhere in there some tax is able to be avoided? Am i right? Who here is an accountant?

What's to stop the trust charging say $200,000 rent for the month of June, then charge $1 a month for the rest of the year? If the company traded a yearly profit after everything of $210,000 then got hit with a $200k rent bill, wouldn't then the taxable profit become 10k? What are the tax laws for trusts?

 

[benbergin]

if they got hit with a huge 200k rent bill, they would go and find a cheaper warehouse.

 

[Frodo]

You are efectively transferring the profit from one entity to another and it is not an 'arms length' transaction. If this results in less tax being paid the tax office will declare it as tax avoidance and both companies will be liable to payment of underpaid tax, fines and possibly imprisonment of directors.

 

[benbergin]

Originally posted by Frodo
and possibly imprisonment of directors.

ahh prison!

is there anything it cant do!

 

[Rob]

I'd guess that the amount on top of the market value of the rent would be non-deductible to the company, and the payment would be assessed to the trust anyway as an unfranked dividend under Div 7A.

There can be advantages in service/administration trusts (eg. Phillips trusts), but the ATO and the courts usually only accept those arrangements where the payments are at market value.

 

[Deej]

Frodo I can see where the example i set out would break a few laws, not exactly subtle business practise, but if i do a forecast cashflow and work out anticipated profit figures for the year then i can roughly set the rent charged to the company to some sort of figure that would minimise tax paid. I can't see what laws that would break.

Also, who determines market value? Is there some sort of guidebook for warehouse sizes and correspoding rental values? I wouldn't think so. What if the going rate for the warehouse is $5k a month but i'm paying $15k a month, who's to say what the correct figure should be? How can the ATO just walk in and say you're charging too much rent i'm sorry it should be X amount instead?

I'm basically trying to find out what benefits there are to renting property off a family trust, sure the idea is to minimise tax paid but there is legal ways to minimise this amount. I want to find out what those ways are.

 

[Frodo]

Originally posted by Deej
Frodo I can see where the example i set out would break a few laws, not exactly subtle business practise, but if i do a forecast cashflow and work out anticipated profit figures for the year then i can roughly set the rent charged to the company to some sort of figure that would minimise tax paid. I can't see what laws that would break.

Also, who determines market value? Is there some sort of guidebook for warehouse sizes and correspoding rental values? I wouldn't think so. What if the going rate for the warehouse is $5k a month but i'm paying $15k a month, who's to say what the correct figure should be? How can the ATO just walk in and say you're charging too much rent i'm sorry it should be X amount instead?

I'm basically trying to find out what benefits there are to renting property off a family trust, sure the idea is to minimise tax paid but there is legal ways to minimise this amount. I want to find out what those ways are.

Get a real estate agent in to assess real market value, that's what the tax office would do.

 

[Deej]

Originally posted by Frodo
Get a real estate agent in to assess real market value, that's what the tax office would do.

My mother is a real estate agent, i could bring her in to say anything i told her to and who could prove anything here or there? Aren't rental prices much like car prices, worth whatever someone will pay? As director of x pty ltd i accept the amounts charged by x trust for rental property x. How can the tax office get me on this?

Ok anyway as an aside, what if someone else is the major shareholder in the trust and they set the amount at say $15k which is $10k over whatever the real estate agent said was market value, what happens then? If my missus were the major shareholder in the trust and i am sole director in the company then would that get by do you think?

By the way, do you know what the benefits are to renting off family trust premises? Surely there is something there, why else would so many people do it?

 

[Rob]

Originally posted by Deej
My mother is a real estate agent, i could bring her in to say anything i told her to and who could prove anything here or there? Aren't rental prices much like car prices, worth whatever someone will pay? As director of x pty ltd i accept the amounts charged by x trust for rental property x. How can the tax office get me on this?

Ok anyway as an aside, what if someone else is the major shareholder in the trust and they set the amount at say $15k which is $10k over whatever the real estate agent said was market value, what happens then? If my missus were the major shareholder in the trust and i am sole director in the company then would that get by do you think?

By the way, do you know what the benefits are to renting off family trust premises? Surely there is something there, why else would so many people do it?

Market value is really only an issue with non-arms length transactions, and it's usually pretty obvious if the payment is 3 times market value. The tax law only allows for an expense to be deductible if it relates to producing your income. If you're paying 3 times the market value for rent to a non-arms length entity, you'd say 2/3rds of the payment has nothing to do with your income, and therefore non-deductible. i.e 1/3rd of the payment is for the rent, the rest does nothing towards generating income. But the entire amount could still be assessable to the entity receiving it.

And to answer your last question, trusts can be a good way to alienate income between entities. If set up the right way, the profit from the trust can be distributed to any entity you like.I wouldn't use a trust to hold property if you intend to negatively gear it though, because trusts can't distribute losses. It does get complicated though, people can get into a lot of trouble because they (and their tax agent for that matter) don't understand the rules. A lot of people set up corporate and/or trust structures unnecessarily, but treat the company bank account just like their own.
Putting a lot of resources into tax planning is not always worth it, and it seems to be getting harder. I wouldn't recommend you set up a trust just for the sake of it.

 

[Frodo]

Originally posted by Rob
Market value is really only an issue with non-arms length transactions, and it's usually pretty obvious if the payment is 3 times market value. The tax law only allows for an expense to be deductible if it relates to producing your income. If you're paying 3 times the market value for rent to a non-arms length entity, you'd say 2/3rds of the payment has nothing to do with your income, and therefore non-deductible. i.e 1/3rd of the payment is for the rent, the rest does nothing towards generating income. But the entire amount could still be assessable to the entity receiving it.

And to answer your last question, trusts can be a good way to alienate income between entities. If set up the right way, the profit from the trust can be distributed to any entity you like.I wouldn't use a trust to hold property if you intend to negatively gear it though, because trusts can't distribute losses. It does get complicated though, people can get into a lot of trouble because they (and their tax agent for that matter) don't understand the rules. A lot of people set up corporate and/or trust structures unnecessarily, but treat the company bank account just like their own.
Putting a lot of resources into tax planning is not always worth it, and it seems to be getting harder. I wouldn't recommend you set up a trust just for the sake of it.

agreed

 

[Deej]

Originally posted by Rob
Market value is really only an issue with non-arms length transactions, and it's usually pretty obvious if the payment is 3 times market value. The tax law only allows for an expense to be deductible if it relates to producing your income. If you're paying 3 times the market value for rent to a non-arms length entity, you'd say 2/3rds of the payment has nothing to do with your income, and therefore non-deductible. i.e 1/3rd of the payment is for the rent, the rest does nothing towards generating income. But the entire amount could still be assessable to the entity receiving it.

And to answer your last question, trusts can be a good way to alienate income between entities. If set up the right way, the profit from the trust can be distributed to any entity you like.I wouldn't use a trust to hold property if you intend to negatively gear it though, because trusts can't distribute losses. It does get complicated though, people can get into a lot of trouble because they (and their tax agent for that matter) don't understand the rules. A lot of people set up corporate and/or trust structures unnecessarily, but treat the company bank account just like their own.
Putting a lot of resources into tax planning is not always worth it, and it seems to be getting harder. I wouldn't recommend you set up a trust just for the sake of it.

I totally don't know what to do, this is all just mumbo jumbo talk. At the moment i have a business that pays rent to someone else and makes excellent profit, and i'm looking at a 6 figure tax bill simply because i don't have enough deductions working in my favour. When should someone set up a trust? I actually already have a trust set up, i had it from day one, accountant advised me to do it, the company trades on behalf of the trust and the beneficiaries listed for the trust are me and my missus. I am sole director of company. I want to establish an expense for the company, that being to the trust, maybe in form of a long term investment (such as a factory/warehouse) that the campany can rent from the trust and help minimise our tax. How should i structure this if not by utilising a trust?

 

[Rob]

Originally posted by Deej
I totally don't know what to do, this is all just mumbo jumbo talk. At the moment i have a business that pays rent to someone else and makes excellent profit, and i'm looking at a 6 figure tax bill simply because i don't have enough deductions working in my favour. When should someone set up a trust? I actually already have a trust set up, i had it from day one, accountant advised me to do it, the company trades on behalf of the trust and the beneficiaries listed for the trust are me and my missus. I am sole director of company. I want to establish an expense for the company, that being to the trust, maybe in form of a long term investment (such as a factory/warehouse) that the campany can rent from the trust and help minimise our tax. How should i structure this if not by utilising a trust?

Hate to be the one to tell you this Deej, but you might have to pay some tax. Tax law is written (sometimes in the most unbelievably complicated way) to ensure that people pay tax on profits. The idea is that if you make a profit, you pay tax. Anyone telling you that they can set your business up so that you pay none or next to none is probably full of sh*t.

Short of doing something illegal (eg. underdeclare income or overstate deductions), there's not really a lot you can do about it.

BTW, i'd suggest that you get your accountant to explain what he's done for you. If you're going to set up complex structures, it pays to know exactly what's going on, especially if it's you that does the day to day running of the business.

 

[Frodo]

I'll make a couple of assumtions.

If you are making six figure profits you are putting a fair whack into your super fund which is a smsf.

If so then one nicity of a smsf is that you can purchase your premises with the fund. Your company still pays rent at market price to the super fund BUT it is taxed at 15%, and the capital gain is at 15% too. A nice little cheat is to make improvements to the premises with company money, which creates an increase in value for the super fund.


ps wait until you're paying seven figures, and the recipients of the tax you pay aren't grateful, they just want you to pay more and call you the filthy rich!!!!

 

[Deej]

Originally posted by Rob
Hate to be the one to tell you this Deej, but you might have to pay some tax. Tax law is written (sometimes in the most unbelievably complicated way) to ensure that people pay tax on profits. The idea is that if you make a profit, you pay tax. Anyone telling you that they can set your business up so that you pay none or next to none is probably full of sh*t.

Short of doing something illegal (eg. underdeclare income or overstate deductions), there's not really a lot you can do about it.

BTW, i'd suggest that you get your accountant to explain what he's done for you. If you're going to set up complex structures, it pays to know exactly what's going on, especially if it's you that does the day to day running of the business.

I don't want to break any laws, got no problem paying tax as such, just want to legally minimise the tax i pay that's all.

The accountant has tried to explain it all before but it is all so friggin hard to understand when people start talking about trusts and entities and corpus something or rather and beneficiaries and shareholders and the accountant i had spoke in such technical terms i just had smoke coming out my ears trying to understand. I've read stuff about quantum mechanics before (which is the toughest reading i've ever done, trying to get my head around that was really tough) and i'd rate this just below in terms of hard to understand.

Frodo, I haven't got any sort of super payments happening in excess of standard ones, but i know i should be paying heaps more than i am because of what you say. But i only know i should be doing it, i don't understand why i should be doing it. I don't get how it all works quite frankly. What is an smsf?

And if those tax bastards ever do that to me i'll hit em over the head with a shovel.

 

[Rob]

Originally posted by Deej
I don't want to break any laws, got no problem paying tax as such, just want to legally minimise the tax i pay that's all.

The accountant has tried to explain it all before but it is all so friggin hard to understand when people start talking about trusts and entities and corpus something or rather and beneficiaries and shareholders and the accountant i had spoke in such technical terms i just had smoke coming out my ears trying to understand. I've read stuff about quantum mechanics before (which is the toughest reading i've ever done, trying to get my head around that was really tough) and i'd rate this just below in terms of hard to understand.

Frodo, I haven't got any sort of super payments happening in excess of standard ones, but i know i should be paying heaps more than i am because of what you say. But i only know i should be doing it, i don't understand why i should be doing it. I don't get how it all works quite frankly. What is an smsf?

And if those tax bastards ever do that to me i'll hit em over the head with a shovel.

At least you seem to have taken the terminology in, even if you don't know what it means.

A SMSF is a self managed super fund, i.e a super fund you run yourself. If you can't understand trusts, I wouldn't recommend you set one up unless your advisor knows what they're doing and you trust him/her. Tax law in relation to trusts in hard enough, when it comes to superannuation funds it may as well be written in arabic. But generally speaking, your employer (which would be your company/trust) can claim a deduction for payments to a complying super fund (which doesn't need to be an SMSF, it can be any commercial super fund) up to the age based limit (the older you are the higher your limit) for it's employees. The catch being you can't access the funds until you retire.

Frodo, be very careful with related party transactions with SMSF's and compliance with the sole purpose test. If the business has a bad year and rental payments to the fund drop (which would be the easiest thing to do as the person running the business, as your own super fund isn't going to commence recovery action), you get into dangerous ground as to whether the fund is complying. It can be done legitimately as long as the relationship stays strictly commercial.

 

[Frodo]

Originally posted by Rob
Frodo, be very careful with related party transactions with SMSF's and compliance with the sole purpose test. If the business has a bad year and rental payments to the fund drop (which would be the easiest thing to do as the person running the business, as your own super fund isn't going to commence recovery action), you get into dangerous ground as to whether the fund is complying. It can be done legitimately as long as the relationship stays strictly commercial.

Yep, they're tightening up on that, but I don't have a problem with it.

 

[Deej]

People, is there anything against the law about writing my final two weeks invoicing on the 1st of July but including all the expenses in this year's trading? Does 'my computer broke down so i couldn't invoice anyone' suffice as an excuse?

 

[Pornstar]

Deej what the hell does your accountant tell you? Mine is ruthless about saving on tax. He advises me to give friends and family stationary as presents for birthdays/christmas so i can claim them on tax. That'd make me popular wouldn't it? Can just imagine me rocking over to my 6 yo niece's birthday party and giving her a calculator or a leather briefcase.

 

[Frodo]

You can hold over the invoice but the cost of goods sold associated with it has to be held over too, otherwise you are illegally deferring taxation.

You are allowed to claim for expenses that are accrued but not realized. A good way is to..say... plan a visit to an exhibition in China in October. Get your travel agent to issue an invoice for air fares and hotels before June 30th. You then claim the expense. If it just happens that something comes up to make you cancel the trip then you have effectively deffered profit, legally.

 

[richieoz]

it seems to me your original idea would only shift income as the 200k you would charge in rent still needs to be picked up as income under the entity renting the building.

One other point, you mentioned a couple of times about an accountant. Ask him thats what you pay him for.

 

[Frodo]

Originally posted by richieoz
One other point, you mentioned a couple of times about an accountant. Ask him thats what you pay him for.

Lawyers and accoutants tend to come under the banner of 5% competent 95% nerds with a certificate.

Good financial advice is very hard to get.

 

[Bomaz_Magic]

Don't believe you can do this, because of the matching principle. Thaat is, all expenses incurred are matched with revenue from that period, thus giving profit. However, you cannot write off $200, 000 rent for one month and pay a $1 for the next 11 months, because the rent should be distributed evenly over the period. What you intend to do is against many accounting principles and SAC's, so sorry but it cannot be done.

 

[Seb]

Originally posted by bomaz
Don't believe you can do this, because of the matching principle. Thaat is, all expenses incurred are matched with revenue from that period, thus giving profit. However, you cannot write off $200, 000 rent for one month and pay a $1 for the next 11 months, because the rent should be distributed evenly over the period. What you intend to do is against many accounting principles and SAC's, so sorry but it cannot be done.

We shall all bow down to Nicko and VCE Accounting.

pfft.

 

[Robin Hood]

Originally posted by Frodo
You are efectively transferring the profit from one entity to another and it is not an 'arms length' transaction. If this results in less tax being paid the tax office will declare it as tax avoidance and both companies will be liable to payment of underpaid tax, fines and possibly imprisonment of directors.

for a start they are trusts

 

[Robin Hood]

Originally posted by Robin Hood
for a start they are trusts

The trust would distribute the profit to beneficaries so its not like no tax would be paid. The question is why would u want to distribute the 200k?