Empower Michael: 25% Tax Rate Triumph in Trust’s Profits
Background – Our client, Michael, operates a chain of coffee shops through a Unit Trust with two other partners. This small business venture generates approximately $2 million in revenue. Michael’s Discretionary Trust is one of the unit holders of the Unit Trust. In the 2023 financial year, he distributed some profits from this small business entity to his corporate beneficiary (a bucket company), through his discretionary trust. He has requested our assessment to determine if his bucket company is eligible for the 25% tax rate.
His Discretionary Trust does not receive any passive income, other than business profits. Similarly, the corporate beneficiary does not have any other passive income.
Key Considerations –
A ‘corporate tax entity’ (broadly, a company or entity taxed as a company) that qualifies as a base rate entity is subject to a lower tax rate. The base rate entity tax rate is 25% for the 2023FY and later income years.
For all other corporate tax entities, the standard corporate tax rate of 30% continues to apply.
- Base Rate Entity Criteria: To qualify, a company must have an aggregated turnover of less than $50 million and less than 80% of its assessable income as base rate entity passive income.
- Passive Income Definition: Includes dividends, rent, interest, royalties, net capital gains, and similar income.
Assessment
- The company’s total income exclusively comes from a Trust distribution.
- 100% of the distribution is related to business income.
- The discretionary trust does not have any passive income.
- The company does not have any passive income.
- The turnover is less than $50 million.
Outcome
Where a company’s only source of income is a distribution received from a related discretionary trust (i.e., the company is a ‘bucket company’), we are required to ‘look through’ to the trust’s underlying income when determining whether the company is a base rate entity for the 2023 income year.
In Michael’s case, the Unit Trust distributed business income to the Discretionary Trust, which then distributed the profit to the corporate beneficiary (bucket company). The company, or his small business entity, had a turnover of less than $50 million. None of his business entities received any passive income in the 2023 financial year. Accordingly, the company is taxed at the 25% tax rate for the 2023 income year.
If you find yourself in a situation similar to Michael’s, where you operate a business through a trust and are considering the most efficient tax strategy for your profits, it’s time to take action. Reach out to the Investax Group for a personalised assessment of your company’s tax situation. Whether your business is structured through a Unit Trust, Discretionary Trust, or any other entity, our expertise lies in navigating complex tax scenarios to ensure you benefit from the most favourable tax rates.
If your business’s annual turnover is below $50 million and you’re unsure about qualifying for the 25% corporate tax rate, let us assist you in determining your eligibility. Our analysis will delve into your business income, assess any passive income, and guide you through the process of ‘looking through’ to a trust’s underlying income, just as we did for Michael.
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