Trading trust or CC

[duncan drennan]

My wife and I are buying some equipment which we are planning to rent out (in the process...looking good so far...). Anyway....

We have some trust structures which we haven't really utilised yet and have been planning to buy the equipment in the trusts name and rent it out that way. The other option would be to set up a CC and rent it out through the CC.

So.....what do you think the best option is? And importantly, why?

[stephanfx]

Might I ask what type of equipment this is?

[duncan drennan]

Might I ask what type of equipment this is?

I'm not sure how that is relevant to the question...

[Dave A]

Thanks for reminding me of this one, Stephan. I skimmed past it last time.

I'm a bit 50/50 on the trading trust vs cc issue myself. Part of the problem is for the trust to stand alone there needs to be that independant trustee. Something of a nuisance.

Other issues to consider are VAT registration and small business tax breaks if applicable. If you can structure to get the tax breaks, then the trading trust is out.

[stephanfx]

Did not mean to pry Duncan, I am just curious.

I read that that the biggest advantage of a trust is that your equipment will be protected against creditors in case on insolvancy, the downside is a rather big capital gains tax when you decide to sell the equipment.

I would say register a CC, and then if things go pear-shaped move it to the trust. That is the advice I received, hope it helps.

Sorry about the question again

[duncan drennan]

Did not mean to pry Duncan, I am just curious.

No problem, I was just curious too We bought some occupational therapy equipment with the plan of renting it out for use by other OTs.

I read that that the biggest advantage of a trust is that your equipment will be protected against creditors in case on insolvancy, the downside is a rather big capital gains tax when you decide to sell the equipment.

A trust can not inherently protect you from insolvency, but can provide a bit of room to move if things were to go pear–shaped — it all depends on what sureties and contracts have been signed. If everything is neatly in a trust then the damage of an attack on you personally (such as a surety), can be limited, or managed better (this all depends on a lot of quite complicated factors though).

Wrt the tax: there is a conduit principle which allows tax in the trust to be passed on to the beneficiaries of the trust. Then means that the higher rates of taxation in a trust can be avoided by passing the income onto the beneficiaries. This also means that your overall tax liability (amongst the beneficiaries) can be spread out evenly. You'll have to speak to an accountant who has good knowledge of trusts and tax about this though, I'm not too sure of the details myself.

I would say register a CC, and then if things go pear-shaped move it to the trust. That is the advice I received, hope it helps.

This doesn't really make too much sense.....by the time things go pear–shaped it is a bit too late to move things across to the trust. There is a six month window for creditors to attach items which have been moved out of an entities name (such as a sale from the CC to the trust).

The structure that I've heard proposed (and there are still a couple of unresolved things in my mind about this) is to have a company structure (say CC or PTY) and to purchase equipment in the trust. The trust then rents the equipment to the company. Assuming that the equipment is totally in the trust (i.e. loan account = zero) and things go wrong with the company then the equipment is not directly exposed to creditors — that is, you still have to pay the money back, but you can at least handle the sale of the equipment rather than the liquidators, and that is a big advantage.

[Dave A]

Assuming that the equipment is totally in the trust (i.e. loan account = zero) and things go wrong with the company then the equipment is not directly exposed to creditors — that is, you still have to pay the money back, but you can at least handle the sale of the equipment rather than the liquidators, and that is a big advantage.

On this aspect, surely you get just as much advantage (control of the disposal of the asset) using a cc or a trust.

Refresh my memory. Trusts can hold member interests in a cc nowadays?

[duncan drennan]

On this aspect, surely you get just as much advantage (control of the disposal of the asset) using a cc or a trust.

Refresh my memory. Trusts can hold member interests in a cc nowadays?

Yip, trusts can hold the members interest. On the control aspect, yes I agree. There is plenty that I am not 100% sure about here — the more I scratch around with trusts the more complicated they seen to become.

For my particular case there are no issues with creditors wrt the equipment, just a separation of the equipment from our personal names (which protects against any other parts of our lives falling apart...hopefully).

Let's look at a scenario, say you have a company and want to buy equipment and make sure it is protected against creditors. For simplicity, let's say that the company that is renting the equipment is a PTY, and the shares are in your personal name. The goal is to create a degree of separation between you and the actual equipment.

Two possible options: 1) buy it in a CC, 2) buy it in a trust. The trust or CC then rents the equipment to the company. Now let's try to figure out which offers better protection and the simplest scheme.

So if you create a CC and you personally hold the members interest, then I would guess the there is effectively no separation. Your members interest can be attached. If you buy it in the name of a trust, then the trust owns the equipment. Assuming that there is no loan account (between you and the trust) then there is nothing to attach.

A trust could also hold the members interest of the CC, which creates separation, but then there are two structures, the trust and the CC, which have to be administered. The trustees will still have to sign everything off, as the trust is the member of the CC. The trustees can make a resolution that a certain trustee may sign all the papers in regards to the CC (and this also applies if it was just the trust buying the equipment).

Does this make sense? Is what I'm saying correct?

If it is, then it seems easier to purchase the equipment in a trust to avoid a second administrative layer.

[stephanfx]

Hi Duncan, to be honest, I do not really know much about trusts and CC's as an own identity.

The thing for me would be to see where I would receive the most legal tax benefit with regards to the income that I receive, whether it be through trust or CC. The way you stated and with the fact that you want total separation where you would not be held responsible for anything, the trust definitly seems to be the best choice.

But that is just my opinion, it would be interesting to see what the rest of the people say.

[Dave A]

I wonder how SARS views "trading" trusts - ultimately they're in vitro trusts really and meant to manage assets, but do the rules of a sole proprietorship apply?

I'm thinking about stuff like depreciation. For example, you might find you can only show the loss in value over the life of the asset upon disposal.

[duncan drennan]

..ultimately they're in vitro trusts....

I'm not sure how SARS feels about those, but auditing them should be helluva interesting!!

I think you may mean intervivos (or "living") trusts.

Trusts are a bit of a strange thing really. In SA law they are not real entities. They are not technically a legal person, but also not a natural person — my understanding is that they are more like an extension of your natural person–hood (if that makes any sense). I would say that for tax purposes they are like a natural person, but have a flat 40% tax rate. AFAIK, there is no issue with depreciating an asset in the trust, but I'll try to find out about this (note to self: send email to accountant).

[Dave A]

I think you may mean intervivos (or "living") trusts.

Ah yes. I stand corrected. Perhaps a Freudian slip...