In our four-part series on the four most common business structures used in Australia we’ve covered sole traders, partnerships and companies, and now in our final post for the series, we cover trusts.
In our Small Business Management Courses we also cover business structures in more detail in the Establish Risk and Management module, which also discusses the implications each of the four different structures can have on how you borrow money and even how much tax you pay.
A trust is a relationship where a trustee — an individual or a company — carries on business for the benefit of other people (the beneficiaries). For instance, a trustee may carry on a business for the benefit of a particular family and distribute the yearly profit to them.
The most common variety of trust is called a discretionary trust. If you’re the trustee of a discretionary trust you have the power to decide how the profit will be distributed among the beneficiaries.
Advantages of discretionary trusts
- A trust provides asset protection and limits the liability if the trust is a company.
- A trust has perpetual existence and does not cease with the death of a beneficiary.
- Beneficiaries are not generally liable for the trust debts, unlike sole traders or partnerships.
- Trusts receive discounts on the amount of capital gains tax payable on capital assets held for more than 12 months.
Things To Consider:
- Like a company, a trust is more expensive and complicated to establish.
- The trustee has a strict obligation to hold and manage the property for the exclusive benefit of the beneficiaries.
- Losses are not distributable and cannot be offset by beneficiaries against another income.
- Unlike a company, a trust cannot retain profits for expansion without being subject to penalty rates of tax.
- Profits distributed to beneficiaries under 18 may be taxed at higher rates.
- It may also be more expensive to complete the require tax and administrative paperwork each year.
Reporting and Paying Income Tax
- A discretionary trust does not have to pay tax. Instead the trust beneficiaries pay tax on their share of the trust’s next income.
- As a trustee, you can decide each year which beneficiaries will receive income.
- Trusts can pay very high rates of tax on any profits not distributed.
- A trust must make superannuation contributions for any eligible worker in employs. This includes you if you’re employed by a trust.
If you’re setting up a family business and want to make each family member a beneficiary without having any actual involvement in how the business is run, consider operating your business as a trust.
This information is only offered as a guide and, of course, you should consult an accountant, tax professional, solicitor or business advisor before deciding which business structure to use.
This was the final post in a series of four about business structures. For more information on business structures, our Small Business Management course covers business structures in greater detail in the Establish Legal Risk and Management module.