Choosing your structures for traders

Question from Linda updated on 24th June 2011:

I'm currently building the new house for sell through trading trust, I have a family trust as well. I understand now the tax law has changed - the company will pay less tax rate than the trading trust. In this case what is the best structure to set up for the business. Keep building business in the trading trust or set up a company and use company to do the business. What's the difference between them? Thanks! Linda

Our expert Mark Withers responded:

Trading trusts were popular during the time it was possible to structure your trading activities such that they didn't taint you investment entities by association. However, on 6 October 2009 legislation was passed overhauling the definition of associated persons. This introduced new tests for association that associates trusts with common settlors and added a universal tripartite test for association. This has meant that it is extremely difficult to legitimately structure to avoid tainting without falling foul of the tax avoidance provisions.

In a commercial sence companies have always provided property deleopers with a good structure that banks, creditors and suppliers understand. Companies also have limited liability protection. The government has announced that the company tax rate will fall to 28% whilst the trust and top personal tax rates ramain at 33%. On the face of it this makes the company cheaper but you must remember that companies will be owned by either trusts or individuals which means that when they pay dividends from their profits the shareholders will need to top up the tax not covered by imputation credits.

However, if you intend retaining you profits in the business and growing it accordingly it is hard to deny that the company tax rate of 28% is attractive.

Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.

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