Hundreds of new companies are incorporated in Australia every day. If you intend to set up or invest in a company, you need to think carefully about how you are going to own the shares in the company. Will you own them in your individual capacity, through a company, or through a trust. In this article, we outline the pros and cons of owning shares in a company through a trust.
What Are the Advantages?
There are several advantages to owning shares through a trust, which we set out below.
With discretionary trusts, the trustee can distribute income to the trust’s beneficiaries at his or her discretion and with the lowest marginal rate. This minimises the aggregate tax payable by the beneficiaries.
Ease of Succession
Control of the discretionary trust may be passed on to the next generation without triggering capital gains tax, or stamp duty. For example, by a person disposing of its shares in the trustee company in its will.
The beneficiaries do not own the trust property (i.e. shares) so there is scope for asset protection from third party creditors of beneficiaries.
50% Capital Gains Tax Discount
Provided that the shareholder has held the shares in the trust for over 12 months, he or she is eligible for a 50% capital gains tax discount on all capital gains earned on the disposal of shares. Companies are not eligible for this discount.
What are the Disadvantages?
Despite the advantages of owning company shares through a trust, there are disadvantages, namely the limits on tax planning. Although tax planning is possible, only a certain amount can be distributed to minors. Minors will be taxed at the highest marginal rate on that distribution unless they are genuinely working for a salary. Any income that the trustee does not distribute by 30 June is taxed at a penalty rate.
The main advantages of holding shares in a trust are the tax benefits and asset protection. Although, we have endeavoured to set out the limitations above. It is ultimately, a balancing act. As the pros generally far outweigh the cons, people often choose to own their shares through a trust.
Perhaps you are looking to set up a company, or considering investing in an existing company. LegalVision’s business structuring experts can assist and provide you with tailored advice on how to hold your shares. We can also help set up your company, including a trust through which to own your shares if necessary, and advise you on what other needs your company may have.
Questions? Please get in touch on 1300 544 755. In the meantime, you can continue reading about holding your shares through a company, or in your individual capacity.