In this video Dannie McKinnon from The Field Group Accounting will be talking about the Trust business structure and why you might consider structuring your business as a Trust.
A trust is an obligation imposed on a person (a trustee) to hold property or assets (such as business assets) for the benefit of others, known as beneficiaries. A Solicitor draws up a Trust Deed setting out the rules of the trust and formalises its administration.
The two main types of trusts are Discretionary and Unit Trusts. A Discretionary trusts deed gives discretion to the Trustee as to who in the family group can receive capital and income from the Trust. A Unit Trust, distributions are calculated by the number of units owned by the beneficiaries.
Trusts can be used to own property, Cash and Share Holdings and in some cases are used as a legal means to move profits from one business to another entity for asset protection. A Trust can also be used to run your business.
The hardest thing we see with our clients to understand with a trust is the relationship between the Trust and the Trustee.
Unlike a company, a trust isn’t a separate legal entity. The Trustee of the trust is the legal entity who owns the assets and enters into contract of the trust’s behalf. It is the Trustee that can be sued, and it can use the trust’s assets to meet those debts before having to use their own. It is quite common to see a company act as Trustee to limit exposure for this reason. The Trustee is the legal owner of the trust assets, however it is own’s them on behalf of the trust.
So why would you set up a trust to run your business?
- Reduced Liability especially if a corporate trustee.
- Assets are protected.
- Flexibility of asset and income distribution. (Mum and Dad, Mum stops work, variable incomes, adult children, self funded retiree parents)
While a Trustee can pay tax on any profits, it is very uncommon and in most instances with a Discretionary trust the trustee will distribute all the profit each year and beneficiaries are required to pay tax on their share of income from the trust.
Where two or more independent people or families are involved, a discretionary trust is uncommon and less appropriate as the trustees discretion means that there is no fixed distributions to beneficiaries.
A Unit trust is a more appropriate structure in this situation as it fixes the income entitlements by the number of units held.
Some disadvantages to running your business out of a trusts is
- Can be expensive and complex to establish and administer
- Difficult to dissolve and dismantle or make changes once established, All can be done, just more cost
- Can’t distribute losses.
- Financial Institutions can find it harder to understand the intricacies of the a trust and therefore it can be more difficult to get loans for assets acquisition both personally or for the trust.
- Retained profits - Beneficiaries get a tax bill and ask so I earnt 100K, but where is the money.
- 80 year vesting period.
Requirements
A Trustee must apply for a TFN and lodge annual tax return for the trust. For a Unit Trust we would suggest a unit holders agreement be done which sets out unit holders rights and valuation methods should they wish to leave the unit trust.
To learn about the other business structures available in Australia watch our other videos below:
COMPANY - • Company Business Struc...
SOLE TRADER - • Sole Trader Business S...
PARTNERSHIP - • Partnership Business S...
For more information visit fieldgroup.com.au
This document contains general advice only and is prepared without taking into account your particular objectives, financial circumstances and needs. The information provided is not a substitute for legal, tax and financial product advice. Before making any decision based on this information, you should speak to a licensed financial advisor who should assess its relevance to your individual circumstances. While The Field Group believes the information is accurate, no warranty is given as to its accuracy and persons who rely on this information do so at their own risk. The information provided in this bulletin is not considered financial product advice for the purposes of the corporations Act 2001.