Structure for Share Trader

Hi All,

I am a share trader and am looking at some possible tax structures to try to minimise tax.

Situation as follows:
1) My trades are all short term (lasting <= 5 days)
2) I do lots of trades (in excess of 200/month)
3) My kids are aged 14 and 16
4) I currently still have a full time job but would like to consider trading fulltime in the near future

Basically, I have been tossing up between a trust and a company. My preference would be for a company mainly because
1) the 50% CGT tax concession does not apply in my case
2) I like to be able to keep some profits in the company and not have to distribute everything - which is what a trust has to. For good years, I like to accumulate some equity to cover for the leaner periods, so having to distribute everything every year is notwhat I want.
3) If my kids were 18 and over then a trust might be more suitable as I can then distribute some income over to them. At the moment, it will just be for my wife and I and I see very little point in having a trust that just have the two of us as beneficiaries. I could just income split by investing half of our funds in her name
4) The profession of share trading is not litigacious, so the asset protection aspect of a trust probably not real relevant
5) I can get a company vehicle
6) I am currently renting at the moment and can claim a portion of my rent as deduction

My wife who does our books and who deals with our accountant has said that the accountant recommended a trust because the setup and compliance costs are lower and also that if the primary purpose of the business is to trade shares then we would not qualify for a company vehicle as it is not something that is necessary for our day to day activities

 

Hi Sim,

Many thanks for your reply.

As far as assets are concerned, we have a couple of properties that are being rented out. These properties are owned in our individual names and have been with us for a long time. As far as any further long term acquisitions are concerned, we may at some stage in the future acquire another property to live in, but outside of that, we will use whatever spare cash to trade shares.

My job currently pays approx $80K. For FY0809, P/L for share trading broke even. For fy0910, my share trading profit thus far is approx $100K. I would expect for FY1011 that my share trading profit will be approx $150K (total guess offcourse).

On the basis of my profits this FY, I am keen to establish whatever structure this FY, so that I can offset these cost against this year's profit. I am keen to have everything finalised before the end of FY, so that I can start minimising tax next FY. This FY, I am resigned to paying a lot of tax, so I might as well use it to establish the correct structure in place.

Any suggestions/opinions would be appreciated

 

Why don't you like what your Accountant recommended ?

Private companies have serious penalties for certain breaches like excessive payments to associates of the owners.

Cheers,

Rob

 

Hi Rob,

My basic reasons for prefering a company are basically
1) I like to keep some funds in the structure and not have to distribute everything. In trading, you have good years and not so good years and I like the structure to be able to drip feed me as I need it, during the leaner years, so that I can minimize tax. So if the company makes a profit, after paying the 30% (now 28%) company tax, I am able to leave the funds in the company structure until I need it.

2) My kids are basically too young to be a legit beneficiary for a trust structure. The oldest one won't be there for another 2 years. Ultimately, even with a company structure, when the kids are grown up, I can try to minimize tax by "employing" them in the company

3) I like to be able to claim all trading related expenses to the company, may be wrong here, but I have it in my head that a company structure would allow me to claim more trading related expenses, including a portion of the rental costs for the rental dwelling that I am staying in.

So my basic aim is to try and set up a company that will pay for the majority of my day to day expenses, examples (just thinking out loud) car, kids school fees ???, stationary, computer equipment, software costs, travelling expenses (both locally and overseas)???, seminar costs, insurance, all trading related expenses etc etc. Ultimately, if my share trading continues to be profitable, I will contemplate trading from home, which will hopefully open up even more deduction opportunities, eg deduct a portion of the rent, electricity etc etc so that I can go rent a nicer place . So the more that I can use the company to pay for everything, the less that I need to pay myself and my wife, which means that I can leave more funds in the company. With this in mind, a company just sounds more legit in what I am trying to do.

At the end of the day, I am not an accountant, in fact have very little idea about accounting and a lot of what I have said may well be totally invalid. I am however keen to entertain various ideas/concepts that may assist me towards the right direction before I make a final decision with my accountant

 

Why don't you run your questions past your Accountant who has complete details of your activities and plans.

Cheers,

Rob

 

Hi Rob,


I appreciate your continued assistance in these matters


Yes you can retain profits in the company.
However, they cannot be enjoyed by the shareholders/employees/associates without incurring penalties such as deemed unfranked dividends.
Likewise, losses (revenue losses, capital losses and bad debts) are trapped in the company and may not be utilised in later years if the underlying share ownership has changed and any new type of business transaction is undertaken.

My hairbrain idea is as follows, please feel free to criticize if completely stupid.

By retaining profits in the company (after having paid the 28-30% company tax), I should be able to extract funds from the company either as salary or as fully franked dividends. By limiting my salary to a level that pays a top marginal tax of 30%, I should then be able to receive additional funds by way of fully franked dividends (which should incur no additional taxes as they are fully franked and my marginal tax rate is 30%

As to losses being trapped in the company, I don’t really have a problem with it as these losses can be written off against future profit. At this point in time, I cannot see why the ownership of the company would change in the forseeable future.


Children can be beneficiaries without tax for up to $3000 of total unearned income.

That’s good to know, thanks

"employing" related parties at higher than commercial rates would be deemed an unfranked dividend and so effectively taxed at a much higher rate

How would the tax office determine whether a particular employee is being paid at “Higher than commercial rates” or not ? Surely they do not go through the books and question the salary levels of each staff member and then compare that with their overall responsibilities within the company, do they? Outside of performing this review, I can’t see how they (tax office) can tell.


Not really true. Your deductions depend on purpose and not who you are. You do not automatically qualify to deduct cars and premises just by incorporating.

So you’re in agreement with my accountant who tells me that I do not necessarily qualify for a company vehicle because I do not need one solely for the purposes for share trading ?

You are effectively losing part of your CGT main residence exemption by claiming rent regardless. Yet if any of your family use that "area" for private purposes then fringe benefits tax may arise.
However, you will be able to deduct your greatly increased compliance costs

I am currently renting and in the short term future will continue to rent, so presumably neither the CGT main residence exemption, or FBT would not be applicable in my case. Further more I understand that I will still be able to claim a portion of the rental payment, together with all the trading related expenses as deductions