03 Jan Law-Service Trusts
Most business professionals are nowadays not involving their families, companies or even trusts in a business organization due to licensing requirement of a particular profession or due to structuring for asset protection (Sharpe, 1981). Therefore, it could be prudent for Mr. Lee to register the company under a service trust since this will give cover to the company assets as well as his own personal assets. The liability that may arise when the bridge collapses may not be transferred to Mr. Lee, neither to the company if and only if the company is owned by a service trust.
Trading trusts have over the years been increasingly used as an alternative trading vehicle for property transactions occasioned by the tax advantages and level of protection associated with them (Smith, 1975). Below is the advantage of using a trading trust in property development.
Trading trust as a property development entity
The advantage of using a trading trust as a property development entity is to break association of individual personal activities from his investments (Salusinszky, 2008). Arguably, limited liability can be achieved with a trading trust as with a company. Section OD 8(4) (c) of the Act, provides that, a trust will be associated with a person if their spouse or infant child benefits or is entitled to benefit under the trust deed. Therefore, if a company has its beneficiary restricted to a trust, the trust will not be tainted by the actions of the company, and can engage in investment properties without fear of unlimited liability. A trading trust is useful in separating individual’s assets from his development activities thus alleviating the implications of extended liability. Therefore, it could be advantageous if Mr. Lee registers the company under the trading trust since no liability will be extended to his personal assets as a result of loss occasioned by collapse of the bridge.
Definition of SMSF
A self-managed superannuation fund (SMSF) can be referred to as a complying superannuation fund. A complying superannuation fund is tax favored trust used in accumulating and holding retirement savings (Phillips, Cathcart, & Teale, 2007). However, to qualify for tax favored treatment, SMSFs must comply with a range of regulatory controls in respect to SMSFs. According to Love (2008), the underlying motivation for setting up an SMSF is the desire to save for retirement in a tax effective manner. In Australia, the SMSFs are regulated by Australian Tax office (ATO).The superannuation law outlines some conditions relating to formation of SMSFs which includes:
Should be formed by less than five members
each member of the fund must be a trustee
No member of the fund should be employed by the other member
No trustee of the fund should receive remuneration for services offered as a trustee (Macnamara, 2008).
SMSFs investments options
On this front, the investment trustee has the full responsibility of making investments decisions (Elton, Gruber, and Goetzmann, 2003; Fant & O’Neal, 1999). Notably, SIS provision as stated in paragraph 52 (2) (f) requires trustees to formulate and give effect to an investment strategy putting in to consideration element of risk, return, cash flow, liquidity, diversification, fund liabilities and their timing (Sharpe, 1964; Tobin, 1958; Landskroner, 1977; Campbell et al., 2001). The fund trust deed provides the trustee with investment powers to invest in broad range of assets over a long term which includes shares, property, investment vehicles as well as various exotic investments (Phillips, Cathcart, and Teale, 2007). However, all the fund investments should be registered under the fund not individual trustees.
Purchase of shares in a golf club and holiday home for the family and friends
It is prudent for Mr. Lee to purchase shares in a golf club as one of the investment ideas. The superannuation law allows the trustee to invest on behalf of the self-managed superannuation fund in wide range of portfolios. However, the law clearly states that, fund members must keep their personal and business assets separate from the fund assets. It goes further to state that all fund assets should be registered in the name of all trustees (Phillips, 2007). Therefore, buying a holiday home for family and friends use goes contrary to laws governing SMSF’s investments alternatives.
Tax implication on goodwill & work in progress (WIP)
There are two types of contributions: concessional and non- concessional contributions. Concessional contributions are contributions to the fund in the financial year which are included in the assessable income of the fund. On the other hand, non-concessional contributions are ones generally made in a financial year and are not included in the funds assessable income (Phillips, Cathcart, and Teale, 2007). Basically, non – concessional income comprises of income derived from personal contributions usually made from after- tax income (Campbell, 2003; Evans & Archer, 1968). The amount that Mr. Lee obtains from selling his business is concessional since it has not been derived from an after tax source. The concessional contribution cap is $ 25,000.00 per year though there is a transitional concessional cap which is $ 50,000 (Sheskin, 2000). However, any amount in excess on these contributions will count on non- concessional contribution cap. The tax rate applied is 31.5%.
An SMSF being a regulated superannuation fund should comply with the laws governing the fund. The law outlines that fund members who are also the trustees or directors can be family members but the number or the trustees should be less than five. A common rationale applied here, is that, parents can impart their investments wisdom to their children through the experience gained on managing substantial asset base (Louton and Saraoglu, 2006). They hold vast experience and tend to make most decisions on fund management through which children can leant and get expertise.
However, the problem arises where the children may opt to set up their own SMSFs, perhaps with their partners since no relief in transferring the assets from their parents’ fund can be obtained under these circumstances. Further, SMSFs are only entitled to four members, it also becomes impossible for a spouse child to join parent fund, thereby putting the child in a strange position of being unable to pool superannuation resources with their spouse (Pratt, 1964). Nonetheless, parents will grow older and perhaps get less confidence which calls for a younger blood to manage the fund resources. So, it always becomes important when children are incorporated in fund management for them to take control once the parents’ ages or passes on.
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