How a startup company can be a corporate beneficiary

If you have a family trust that you want to get money out of, you need to know how a startup company can be a corporate beneficiary.

That sounds heavy. But it’s not too bad (we think).

Corporate beneficiary means: A company that receives a distribution from a family trust (which can also be called a discretionary trust).

Why would you want to get money out of your trust? Mostly, it’s when business owners are looking to build a nest egg for their family or if their startup is coming up to exit time.

Here’s an example of how a startup company can be a corporate beneficiary:

The Robinson Family Trust has earned $300,000 in profit.

First, they distribute it to the people within the trust, up to the limit of the minimum tax rate, which means each person gets about $37,000 as they’ll only pay 19% tax on it (after that threshold, they’ll pay more tax – 32.5% in the next bracket).

The remaining profit will go to a corporate beneficiary – a startup company that Mrs Robinson founded. This will be taxed at 27.5%, since the company’s annual turnover is less than $25 million.

Things get complicated when you want to get the money OUT of the corporate beneficiary – i.e. your startup company. There are two main ways to do this.

Loan from your startup company

This is called a Division 7A loan, which the ATO regulates. You will have to make minimum annual repayments to your company at an interest rate which the Reserve Bank of Australia sets each year (usually 5-7%).

If your loan is unsecured, you will have seven years to pay it back. If your loan is secured (e.g. via a property) you will have 30 years to pay it back.

This strategy can be very effective for buying property. For example, you loan 20% of your house deposit from your company, and the other 80% from your bank.

These loans are not for everyone and if you do want to go down this path, make sure you get a professional on board because if it’s not done properly, you can wind up in a world of pain with the ATO.

Or, you can pay dividends to your company’s shareholders

This can be individual people but from a tax (and risk) perspective, it’s better for your main shareholder to be your family trust. We explain why in this article, which also covers the important subject of how to pay yourself from your startup company.

When you’re paying dividends, you need to consider the franking credit on it.

Frank who?  Basically, a franking credit reduces the amount of tax the shareholder pays on the dividend by accounting for the fact the company has already paid 30% tax on its income. So if the shareholder is due to pay 34.5% on their dividend, they’ll only have to pay 4.5% thanks to a franking credit of 30%. 

Oh, so THAT’S how a startup company can be a corporate beneficiary

Sorry, we know it’s not exactly a fun or easy thing to understand. And while we believe in empowering startups to take control of their finances, some stuff is just not worth your time and is too risky to DIY, so we’re here if you want to chat about how a startup company can be a corporate beneficiary.

Don’t take this as gospel …

Or personal tax advice. We need to understand your personal situation to give you personal advice. And our tax expert Mike is best for that.

Image from pixabay.com on pexel.com

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