Part B

Aleks is a general insurance broker and owns his own practice. The practice is operated by Broking Co Pty Ltd. Aleks is a Director of Broking Co Pty Ltd.

Aleks has built the business effectively from scratch. Broking Co Pty Ltd was loaned $15,000 from Aleks' father to cover the rental guarantee on his first office, but this loan has since been repaid. Aleks made no financial contributions, only the effort to build the business.

100% of the shares in Broking Co Pty Ltd are owned by The Broking Trust and Aleks is the trustee of that trust. The Broking Trust is a fixed trust, and Aleks holds 100% of the units in the trust.

The business has generally been highly profitable, but the impact of the COVID lockdowns on both his clients and the operation of his own practice means in the current financial year, Broking Co Pty Ltd is likely to have a net tax loss of $100,000.

In previous years Aleks has distributed profits to a separate trust, The Wealth Trust. The Wealth Trust is a discretionary trust and has made a family trust election. Aleks is the trustee of this trust.

The Wealth Trust holds a diversified portfolio of investment assets valued at approximately $4 million. The trust is forecast to have income from rents and dividends of $150,000 for the current financial year. None of the dividend income is franked. Aleks is also considering selling a property owned by the trust which would realise an $80,000 capital gain if he did so.

Aleks has an employment contract with The Broking Trust which sees him paid $70,000 a year + superannuation guarantee contributions.

Aleks has two daughters.

Samantha is age 32 and is currently not in paid employment while she is undertaking study to change careers, which is expected to take at least two more years. Samantha had operated a small restaurant which closed down and Samantha has a carry-forward capital loss of $150,000 from the fit-out.

Eva is age 15 and in year 10 at school, and has a casual job at McDonalds with earnings of approximately $6,000 a year.

Aleks is a member of a public offer superannuation fund with a current balance of $1 million.

Aleks has told you that he thinks he is ready to sell his business. He has an informal offer from a colleague (Rick) who would like to purchase the business for $1 million. Rick would want Aleks to remain as an employee for 2 years on an employment package of $150,000 a year + superannuation guarantee contributions.

Aleks would like to go ahead with the sale and it will be entered into on the forthcoming 1 July. Rick does not mind whether he buys the shares in Broking Co Pty Ltd which would continue to operate, or if he purchased the business assets out of Broking Co Pty Ltd into a new entity.

1. Advise Aleks of the elections to distribute he should make as trustee of The Wealth Trust and The Broking Trust. Assume Aleks' goal is to minimise the amount of tax payable, and he is happy to distribute to any eligible beneficiary. Further assume that as trustee he decides to sell the property owned by The Wealth Trust.

2. Estimate the tax payable on your recommended election, and the alternative of 100% of the income of each trust being distributed to Aleks.

3. Advise Aleks of which of the two options he should take for the sale of the business to Rick. You do not need to calculate exact tax liabilities for this recommendation, but should be able to explain the broad tax difference between the two options.

4. Describe to Aleks potential strategies that might be available to reduce tax on the sale of the business, and what personal preferences may be relevant to which strategies were pursued.