"For example, say I had a Discretionary Trust, I'd have to distribute all profits in a given year right?
To avoid hitting the top personal tax bracket, could I disperse profits into a company and only pay the company rate instead of the highest personal tax rate?
If so, how does the equity sitting in the company get used to purchase new shares in the trust?"
You've highlighted one of the limitations of the sort of arrangement you've described, namely a Trust with a Beneficiary Company.
Over time, there is an inevitable "leakage" of capital from the Trust, to the Beneficiary Company. And the more aggressively capital gains in the Trust are realised, which have to be distributed to the beneficiaries, the greater the rate of capital migration from Trust to Company.
Also, this sort of arrangement that includes a beneficiary company is only really worthwhile if the Trust has a limited number of individual beneficiaries and you have substantial investments (I'd say >$2.5m in invest-able assets), because it creates a number of corporate entities for which accounts need to be maintained and tax returns need to be prepared. There is also quite a lot of administration involved (keeping of records, minutes, notes relating to distribution declarations, trustee and directors meetings, company filings with ASIC, etc.)
Finally, another thing to consider is that the Tax Office is increasingly taking a dim view of Trusts having corporate beneficiaries. I fully expect this arrangement to be subject to targeted legislation under the next Labor federal government, given the leader of the Labor Party has been quite outspoken about the mechanics of Trusts and their role in reducing the tax obligations of wealthy Australians.
And I have to say, I have some sympathy with his objections to them.
So, I would suggest that even if someone was today of the mind to set up a discretionary trust, they would be well served waiting to see to what extent the goal posts are shifted under a Labor government (because I am sure they will be... assuming Labor forms the next government, of course.)
