A trust is a type of business structure often used by family businesses. In this structure, a trustee, who is either an individual or a company, will carry out the operations of the trust on behalf of the beneficiaries. Governing the trust is a Trust Deed which details all the rights and obligations of all parties involved. Generally, the various family members are made the beneficiaries of the trust operating the business.
A trust is a separate entity for tax purposes. This means the trustee will need to apply for a Tax File Number (TFN) for the trust and will need to lodge annual income tax returns.
One of the most common types of family trust used to operate a business is known as a Discretionary Trust, also known as a Family Trust. We’ll refer to them as family trusts for the rest of this article.
The main reason these are so common is that family trusts offer a high level of flexibility compared to other types of trusts. In a Family trust, there is no beneficiary with a fixed interest in the trust’s property or income. This means that the trustee has complete discretion in how the funds are distributed to each beneficiary. The family members are then protected from business risks while the trustee has the discretion to distribute income in the most tax-effective way.
Advantages of using a Family Trust
The advantages include:
· Asset protection when a corporate trustee is used (we always recommend having a company act as trustee instead of individuals for this very reason)
· A 50% 12-month CGT discount
· Access to small business CGT concessions
· Added flexibility with the distribution of income and capital
· Broader tax planning opportunities
· A Family Trust can pay wages, salaries, and superannuation
· Relatively easy to operate and administer
· There are less regulatory requirements compared with trading as a company
Disadvantages of using a Family Trust
· Losses cannot be distributed (a loss in a trust is trapped until it can be offset against future income)
· All income must be distributed, the trust cannot (tax effectively) retain any profits unlike a company (which can retain profit at a 27.5% tax rate)
· If an individual trustee is used, the trustee can be personally liable for certain debts of the trust (this is why a corporate trustee is recommended)
· Family Trusts require more of an investment to maintain over sole traders or partnerships (the additional up-front cost is a worthy investment when you consider all the positives)
· Distributions will need to be made in accordance to the Trust Deed (your accountant will handle this)
· There is a risk of resettlement if changes are made to trust members or trust property without consideration to the Trust Deed (Your accountant and lawyer will handle this)
Should you use one?
There are many benefits available to business owners who are looking to shift their business operations into a trust structure (or start a business in a trust structure).
Whether a trust is the right option for your business will vary based on many different factors within your business and personal situation.
As each business is different it is important to seek professional advice from your accountant before establishing a trust. You will also need the advice and guidance from your accountant in order to ensure the requirements of using a trust are met on an ongoing basis.
If you are interested in starting a new business or transitioning an existing business into a trust, then contact Link Advisors for a no-cost strategy session to see if it will work for you.