Tax Tip - Corporate Beneficiary

For many families that already have a family trust as part of their overall structure, the addition of a corporate beneficiary may make sense, if used correctly.

Below we outline the advantages and disadvantages of using a corporate beneficiary as part of your overall structure.

What is a corporate beneficiary?

Put simply, a corporate beneficiary is a company that is established and included within the list of eligible beneficiaries of your family trust. There are a number of conditions that must be met, such as ensuring the family trust deed and legislation allows for the inclusion of such an entity to be a beneficiary of the trust, amongst others.

What are the advantages of using a corporate beneficiary?

As a company, a corporate beneficiary is subject to a flat rate of income tax of 30%. If the taxable income of your family members is greater than $37,000 they will already be subject to a marginal income tax rate that is greater than 30%. Therefore, once each of the other eligible beneficiaries within your family have a taxable income greater than $37,000 any additional net income of your family trust could be distributed to the corporate beneficiary and be subject to a comparably lower income tax rate.

If the funds that are distributed to the corporate beneficiary are then invested, the family as a whole will have a larger portion of after tax funds to invest. Let's explain this concept with an example:

The Smith Family Trust has net income in a year of $50,000. John Smith and Smith Investments Pty Ltd (a corporate beneficiary) are both eligible beneficiaries of the Smith Family Trust. Prior to any distribution from the Smith Family Trust John has taxable income of $81,000 from his salary income. If the $50,000 were to be distributed to John it would be subject to income tax of $19,500, so John would have $30,500 of the original $50,000 to invest after tax. However, if the $50,000 were to be distributed to Smith Investments Pty Ltd it would be subject to income tax of $15,000, so Smith Investments Pty Ltd would have $35,000 of the original

$50,000 to invest after tax. The family as a whole is $4,500 better off.

The compounding of this tax saving over time can become substantial.

The corporate beneficiary is free to invest in any class of asset it so wishes. Many of our clients invest the funds that have accumulated in their corporate beneficiary in shares that pay fully franked dividends as there is no further tax to be paid by the corporate beneficiary on this income.

Upon retirement, the family members could start to draw down on the funds invested in the corporate beneficiary to supplement their superannuation pension income. Based on current laws, once the family members reach 60 years of age they would be able to draw down approximately $20,000 in income each tax-free in addition to the income derived from their superannuation pension. This is on the basis that they have fully retired and do not have any other income.

The income that is drawn down from the corporate beneficiary would be in the form of a fully franked dividend with franking credits attached. Depending on their income levels at the time, the family members may be entitled to a refund of these franking credits personally and hence recoup some or all of the tax that was previously paid by the corporate beneficiary.

What are the disadvantages of using a corporate beneficiary?

The disadvantages of the use of a corporate beneficiary can be best summarised as follows:

A company is not entitled to the general CGT discount. Therefore, if its investments are later sold for a gain it will pay tax on this gain at a flat rate of 30% on the full gain as opposed to half the gain. However, this needs to be compared with the initial tax saving and the ability to invest a greater portion of every $1.00 earned. Capital gains tax is also only relevant if the investments are actually sold in the future.

Any funds that are distributed to the corporate beneficiary need to be physically paid in cash to the corporate beneficiary. That is, you can't merely distribute the profit to the corporate beneficiary "on paper" but then take the cash for yourself to spend or invest. This can be best overcome by ensuring that distributions from the family trust to family members are sufficient to meet their living and spending needs and then any excess net income of the family trust can be distributed to the corporate beneficiary.

Annual compliance costs associated with the company (e.g. ASIC fee as well as the preparation of an income tax return and financial statements).

More information

If you would like more information or would like to speak to someone to determine whether a corporate beneficiary is appropriate for your particular circumstances, please contact our office on (02) 9894 8884.

Sincerely,

The Team at
Vantage Partners
02 9894 8884

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Important: Clients should not act solely on the basis of the material contained in this tax tip. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. Tax tips are issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.