Hi there, I need help with this question

CLIENT SCENARIO:

Background

Scrooge

Dr Scrooge runs a financial planning practice company called Scrooge Financial Planning Pty Ltd, of whom Scrooge is Managing Director and majority shareholder. Dr Scrooge is an executive employee of the company. This year, the company is expected to earn revenue of $320,000, and incur expenses of $100,000 for Dr Scrooge's salary, as well as a fee to Scrooge Management Company Pty Ltd of $200,000. Scrooge Financial Planning Pty Ltd's taxable income this year is therefore expected to be $20,000.

Behind the financial planning practice, for asset protection purposes Dr Scrooge operates a family discretionary trust, of whom the trustee is Scrooge Pty Ltd as Trustee for the Scrooge Family Trust. The trustee is the legal owner of all Scrooge Family Trust assets, which embody all the assets used in the financial planning practice. The primary "beneficiaries" (really, discretionary objects) of the Scrooge Family Trust are Dr Scrooge, Mrs Scrooge, Hughie and Louise (the children being aged 15 and 13 years respectively). These same people are also the Takers-in-Default (or Secondary "Beneficiaries") of the Scrooge Family Trust. To maintain a degree of independence in the trust, the trustee has resolved that Prof McDuck, the family accountant, acts as Appointor for the trust, appointing income and capital beneficiaries in any given income year. Under the trust deed, Prof McDuck must exercise his discretion in this regard by 5 PM on 30^th June in any given income year. There is no variation clause in the trust deed.

To prevent commingling of trust funds with other monies, the trustee Scrooge Pty Ltd has also resolved that a management company, Scrooge Management Pty Ltd, manage the trust assets on its behalf, particularly when dealing with the financial planning practice. This management company is interposed between the family discretionary trust and the financial planning practice company (i.e. between Scrooge Pty Ltd as Trustee for the Scrooge Family Trust, and Scrooge Financial Planning Pty Ltd). The management company, Scrooge Management Pty Ltd, leases assets used in the financial planning practice from Scrooge Pty Ltd as trustee for the Scrooge Family Trust, for an annual aggregate lease premium of $160,000. For this income year, the assessable income of Scrooge Management Pty Ltd is $200,000 (being the management company fee paid by Scrooge Financial Planning Pty Ltd for use of trust assets used in the practice). Allowable deductions for Scrooge Management Pty Ltd are expected to be the $160,000 lease premium paid to Scrooge Pty Ltd as Trustee for the Scrooge Family Trust in respect of trust assets used in the practice, as well as a salary of $20,000 paid to Mrs Scrooge to act as Practice Manager in the financial planning practice one day per week. Mrs Scrooge is MBA-qualified. This year, the taxable income of Scrooge Management Pty Ltd is expected to be $20,000.

This year, income of the trust estate for the Scrooge Family Trust is expected to be $160,000 (assessable income), $20,000 in allowable deductions (almost all of the tangible assets used in the financial planning practice having been long since written off for tax purposes), leaving a taxable income of $140,000. Also this year, Prof McDuck proposes to distribute this trust income as follows: $59,200 to Dr Scrooge, which together with his $100,000 salary would give Dr Scrooge an income of $159,200; $80,000 to Mrs Scrooge, which together with her $20,000 salary would give Mrs Scrooge an income of $100,000; and $400 each to Hughie and Louise.

Mickey also works for Scrooge Financial Planning Pty Ltd, and though he is a Director, he is a minority shareholder. Mickey is an executive employee of the company. This year, the company is expected to incur expenses of $80,000 for Mickey's salary.

Like Scrooge, behind the financial planning practice, for asset protection purposes Mickey operates a family discretionary trust, of whom the trustee is Mickey Pty Ltd as Trustee for the Mouse Family Trust. The trustee is the legal owner of all Mouse Family Trust assets, none of which are used as assets in the financial planning practice. The primary "beneficiaries" (really, discretionary objects) of the Mouse Family Trust are Mickey, his wife Minnie, Millie and Melody (the daughters being aged 13 and 10 years respectively). These same people are also the Takers-in-Default (or Secondary "Beneficiaries") of the Mouse Family Trust. To maintain a degree of independence in the trust, the trustee has resolved that Pluto, the family solicitor, act as Appointor for the trust, appointing income and capital beneficiaries in any given income year. Under the Mouse Family Trust deed, Pluto must exercise his discretion in this regard by 5 PM on 30^th June in any given income year. There is no variation clause in the trust deed.

This year, assessable income, deductions and taxable income of the trust estate for the Mouse Family Trust are all expected to be 80% of those for the Scrooge Family Trust. Pluto as Appointor proposes to distribute this trust income as follows: 10% to Mickey (on top of his salary); 89.5% to Minnie Mouse, who is a homemaker; and $280 each to Millie and Melody.

The Problem

Scrooge comes to you seeking advice. He is always thought of Mickey as a 'partner' in the financial planning practice, even though it is set up as a company. He is aware that Mickey operates a family trust for asset protection purposes. Scrooge has heard from Mrs Scrooge, who is MBA-qualified, that it would be a good idea for Scrooge and Mickey to either expand the financial planning practice, or even diversify into other lines of business or investment using a partnership of their two family trusts as the legal structure.

While Scrooge thinks that Mrs Scrooge's proposal has some merit, he wants to use you as a sounding board to advise him of the tax implications of Mrs Scrooge's proposal.

He gives you carte blanche to advise him in relation to all aspects of the proposal, including - but not limited to - the ability to carrying forward any losses for tax purposes (particularly losses in other lines of business or investment) and the ability to offset those losses against his existing income streams; ability to, and consequences of, introducing new equity participants to the business under the proposed partnership of discretionary trusts; more efficient ways of splitting aggregate business income with other family members (including employing them), and the consequences of this for superannuation, salary packaging and Fringe Benefits Tax; and issues that may arise if either Scrooge or Mickey want to sell their interest in the financial planning practice, or other businesses or investments, or indeed, if they wish to sell any of these businesses or investments entirely to third parties. (Mrs Scrooge mentioned that private equity firms might even be interested in buying some or all of these businesses at some time in the future).

From your point of view, you have some questions on which you need clarification, and you phone Scrooge, following up the phone call with a confirmatory letter. You reduce your questions to just five key matters on which you need further information.