Business Structure - Trusts
A trust is a relationship where a trustee (an individual or a company) carries on a business for the benefit of a range of people (the beneficiaries). It is commonplace for the trustee of a trust to be a company (a corporate trustee) for asset protection purposes.
A trust is not a separate legal entity. It is a relationship under which the trustee holds property for the benefit of 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. A trust may be discretionary (i.e. be able to benefit a range of people in the proportions that the trustee decides) or have fixed interests (i.e. will benefit certain people in fixed proportions). Trust income can be distributed among a wide range of people, often including the extended family of the business principal.
Advantages of a Trust
- Ownership of the business by a corporate trustee provides asset protection and limits liability in relation to the business.
- Trusts are very flexible for tax purposes. A discretionary trust provides flexibility in relation to the distribution of income and capital gains amongst beneficiaries. You and your business partners or family members could be the directors and shareholders of the trustee company and could dictate when and where income or capital is distributed.
- Beneficiaries of a trust are generally not liable for the debts of the Trust, unlike sole traders or partners in a partnership.
- Beneficiaries of a trust pay tax on income they receive from a trust at their own marginal tax rates.
- Generally speaking, the eventual sale of any capital assets of a trust (such as your business premises) will attract capital gains tax (CGT) on any positive difference between the cost of the capital asset and the proceeds received on disposal. However, trusts receive a discount on the amount of CGT payable on capital assets which have been held for more than 12 months.
Disadvantages of a Trust
- The cost of establishing a trust is significantly more than for establishing sole traders and partnerships.
- A trust is a complex legal structure, which must be set up by a solicitor or accountant. A Grade Tax can assist you with the set up of your trust.
- Operation of the business is limited to the conditions outlined in the trust deed.
- As with a company, there are extensive regulations with which a trust must comply.
- Losses derived in a trust are not distributable and cannot be offset by beneficiaries against other income they may have.
- Unlike a company, a trust cannot retain profits for expansion without being subject to penalty rates of tax.
How do I form a Trust ?
Speak to A Grade Tax in relation to how a trust deed can be drafted. This deed outlines how the trust can operate.
Tax implications for a Trust
There are a number of potential tax implications to consider if you are thinking of setting up a trust, including:
- Asset protection benefit
- Capital Gains Tax
- Income Tax
- Distribution of income and capital
- Establishment and ongoing costs
For further information on our full range of services in accounting, taxation, bookkeeping, tax return, planning and tax advice please contact A Grade Tax Accountants in Penrith on (02) 4731-1405 or visit our website www.agradetax.com.au
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