Seo and Jin are married. They are carrying on a business as franchise cleaners. This year, they earned $193,000 from the business and paid $56,400 in expenses. In addition, Seo took a salary of $24,000 in recognition of Seo's marketing skills in bringing more business their way. They also jointly receive income from investment properties, which generated $79,500 per annum in rental income and $13,750 per annum in expenses. Seo and Jin have two adult children, Hyuk and Wan, who are both studying full-time at uni and have no income. Seo and Jin ask whether a trust should be established over the investment properties, making the children beneficiaries. Your answer should show calculations comparing the options of interposing a trust or not.
a) Compare the total income tax paid under the current partnership structure:
- Assume the amounts are GST exclusive
- Under the existing partnership the net income is
|
Income
|
Item
|
Amount
|
|
|
Business Income
|
193,000
|
|
|
Rental Income
|
79,500
|
|
Deductions
|
Business Expenses
|
-56,400
|
|
|
Rental Expenses
|
-13,750
|
|
Net income partnership
|
|
202,350
|
- From this income of $202,350, $24,000 is paid to Seo as salary and the remainder $178,350 is split: $89,175 each to Seo and Jin
b) Now calculate the total income tax if a trust was used for the rental property income. To do this you need to separate the business income, do the same distribution as above, then determine the net rental income which will be within the trust structure. The trust then distributes the income in the most effective way within the family.
c) You will find (or should) that the trust is more tax effective. What disadvantages are there though if they wanted to go ahead and set up the trust structure for the rental properties?