In: Accounting
3) Regarding Business structure
Dan Murphy is considering a change of his business structure
from the sole trader to another structure commencing on the 1st of
July 2019 (starting from a new financial year).
He has provided you with the following financial and other family
details.
Dan is earning $150,000 (net of deductions) per annum from his
engineering business. Judith earns $10,000 (net of deductions) from
her teaching job.
They have the following family members living with them.
Robert Murphy: Dan’s father who is 70 years old. He has retired from his job as chief executive officer of Suncorp Ltd on the 15th of July 2019 (gross income was $2,000) and has not been earning any income since retirement. Judith takes care of him as his health has deteriorated recently.
Jean Murphy: 19-year-old son. He is a full time university student, currently no income.
Xavier Murphy: 15-year-old son, full time high school student
Megan Murphy: 2-year-old daughter.
Dan is considering the following options.
Remaining Sole trader stucture
Partnership with Judith in equal profit sharing ratio
Australian registered private company
Discretionary Family Trust
Required
Please advise which business structure would you recommend in
order to minimise tax on the client’s income.
Comment on the tax implications of each business option
considered.
Discretionary Family Trust is good option for Dan .
Discretionary trusts are set up to allow the person or people managing the trust to choose:
Family trusts as generally understood are discretionary trusts that hold a family’s assets or run a family business. Usually, one or more family members will manage the trust assets for the benefit of their family as a whole.This person sets up the trust. Usually, the settlor will be a lawyer or accountant. Once the settlor does their part in creating the trust, they generally have no further involvement. The settlor cannot benefit from the trust.
This person is the legal owner of the trust property. The trustee decides how to manage the trust assets. However, even though the trustee makes all decisions, choices and transactions relating to managing the property, they do so in the interests of those benefiting from the trust. The trustee must act in the best interests of these people.
This is the legal document that formally creates the trust and outlines how it will work. It will usually set out:
Discretionary trusts are a great way of providing income to beneficiaries who may be dependent or otherwise unable to manage their assets.
Tax Implicatons:-
A family trust typically pays zero tax on income from within the trust. Instead, the income is distributed to the beneficiaries, who are taxed at their personal tax rates. ... They are free to distribute the income to as many beneficiaries as they see fit.