Best vehicle to distribute large revenue streams while avoiding family disputes

Hi everyone,

This is my first post here and I'm looking forward to becoming a regular reader of this website. I stumbled across it while looking for more information with trusts and I'm pleasently surprised with the amount of knowledge here... Great website for Aussie investors!

Anyway, let me explain my predicament. At the moment we have a family company which for a long time only had one family to provide for so it worked well. Now there are 2 distinctly seperate families for which the company provides for and as a result some issues have reared their head such as inequality. At the moment, individuals from both families receive wages and run business expenses through the company.

I feel it would be much better to simply distribute an evenly aportioned amount of money to an investment vehicle managed by each family and have that family's vehicle then distribute money to individuals within that family.

I thought a discretionary trust may be the best vehicle to do this but the problem is that rental return from the family company is running close to $1 million a year not including dividends from investments which runs close to $200K / year.

Correct me if I'm wrong but each trust has to distribute it's funds completely otherwise the highest marginal rate of tax is calculated on undistributed income? This obviously leaves each trust having to distribute large amounts of income to it's beneficiaries which isn't ideal.

I'm looking for other solutions to this problem and I'm hoping someone might be able to offer some suggestions. Maybe setting up a family company for each family which has a shareholding in the holding company?

Looking forward to some insight...

John

Hi John, welcome to InvestEd!

(First up, I'm not an accountant - this is only my non-professional thoughts on the matter).

Yes, if you use a trust, it must distribute all net income each year or pay penalty tax.

I guess it depends on the situation of each family. If they already have a trust with investment assets, they may appreciate having the money come into that trust.

If they don't want to distribute the income, they could choose to use a company structure so that they only pay 30% tax each year.

The challenge you will face if trying to keep things completely equal is what happens to all the expense people are currently running through the business? If your goal is to remove that for equality - they stand to lose out on some easy tax minimisation techniques.

I guess if each family were to set up a Pty Ltd company (as an "investment company"), as 50/50 owner of the family company, they could then choose to run expenses through their own company and distribute income however they choose?

I think there are a lot of options available to you.

Either way, it's a nice problem to have!

John - firstly - good work on having the old school / old money family company.

Due the the levels of income (and I assume assets) involved, it is essential that you seek competent paid professional advice (accounting and legal) on any re-structuring.

I understand how this relatively simple company has grown into such a beast.

All is not lost however.

Firstly you have asked how to separate and split the revenue streams (rental income and dividends). My opinion is that you should look at having the two separate parties / families each establish at least one family/discretionary trust each.

Next I would have the company issue dividend access shares to the respective family trusts (50/50 I assume) that give each trust (and thus each family) the right to receive its split of the income each year.

You really need to get paid, competent specialist advice with this issue because if done incorrectly you can get into trouble with the ATO in terms of value shifting.

Year to year the company will receive all the rental and dividend income, claim DIRECTLY RELATED EXPENSES ONLY and pay the tax on the profit at 30%. Subsequently they company will pay fully franked dividends (maybe an interim and final dividend just like an ASX listed company) to the family trusts.

Each family trust will be controlled each family / family group and they can decide between themselves who to distribute the income to and how. They can also run their own wages and expenses through each of their family trusts and look after their own tax planning.

There are two many options to go into as each family will have its own requirements and situation however this structure will typically work best based on what you want to achieve. I have seen it work well in practice.

Some other key things you need to think about:

1. You need a shareholders agreement for the company that determines how each family / shareholders deal with each other and what their responsibilities and obligations are to each other.
2. Look at the directorship of the main company and try to keep it even in terms of representation and even look at having a couple of trusted advisors on the board to break disputes if they arise (it may be worth paying them for their services)
3. There needs to be some pretty extensive estate planning including deeds of succession for the trusts to ensure control flows to the next generation smoothly
4. Each family trust should have its own trustee company
5. Plan it out and talk about it to ensure everyone is on the same page, get the advice and make it happen.
6. Make the change @ 1 July (new financial year) and ensure everyone knows about the cash flow implications.

Good luck with everything.

If you have further questions please let me know

SM

Thank you very much for your advice Superman and Sim. I really appreciate your ideas and thoughts.

I will be contacting our financial advisor in due course to discuss this matter further.

Hopefully this thread will be useful to other people who might be in this situation.

Thanks again!

John