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Trust Business Structure

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Many business owners who want to leverage tax benefits choose to split their income under a trust business structure rather than establishing a company.

But while the benefits outweigh the risks, you can still end up with less asset protection and higher liabilities if you cannot properly establish the trust business structure.

Trust business structure: In a Nutshell

Before we discuss how to set up a trust, keep in mind that it is a business structure rather than a separate legal entity. That means the company becomes the trustee and will operate for its beneficiaries or members.

It’s also worth noting that trust business structures are reliable ways to split your business income among beneficiaries, thanks to their marginal tax rate. Despite that, you may need to deal with high upfront and ongoing costs.

How can I set up a trust business structure?

Consider a trust business structure as a triangle, where you or the trustee distribute the funds to all beneficiaries in the trust.

A trust typically consists of the following members:

  • The settlor: responsible for settling money in the trust
  • Trustee: The business or any individual who is the legal owner of the properties in the trust. They have the authority to execute any trust transactions and act and decide for their beneficiaries’ best interest.
  • Appointor: While many trusts don’t have an appointor, you can still opt to appoint one on your trust. They have the authority to establish a new trustee in the event of the former’s bankruptcy or death (if the trustee were an individual).
  • Beneficiaries: The remaining members in the trust business structure are its beneficiaries enlisted in the trust deed and will receive distributed profit/capital.

Difference Between Trust and Company

If you’re running a company, it is technically written under your assets and that it is something a lender or creditor can access.

On the other hand, a trust business structure has no single owner but is only managed by a trustee. Therefore, it is a fluid-structure and is ideal for business owners who care about protecting their assets.

How does a trust business structure work?

Basics of starting a trust

  • Register for a Tax File Number (TFN), so the trust can file its annual tax returns that indicate cash flow for the financial year, including any distributions to beneficiaries.
  • Then, sign the trust up for an Australian Business Number (ABN)
  • You may also require beneficiaries to meet Pay As You Go repayments on the profit they receive from the trust.
  • Depending on your trust deed, you can use the trust to make SMSF contributions to the trust’s employees and trustees.

How important is a trust deed?

The trust deed is the core foundation of every trust business structure that explains:

  • The trust’s primary purpose
  • Who the beneficiaries and trustees are
  • The liabilities and rights of every member
  • How the trust distributes profit from its assets to the beneficiaries

In some ways or the other, a trust business structure operates as a company institution. But unlike the latter, a trust relies more on the relationship between a trustee and other members.

Advantages of a trust business structure

Asset Protection

The most reliable trust business structure is when it appoints the company as its trustee. That way, the creditors will have limited recourse to reclaim their assets if a beneficiary incurs debts or gets sued.

Securities and Investments Privacy

The Australian Securities and Investments Commission (ASIC) doesn’t require trust business structures to register themselves. But the company that acts as the trustee will have to sign up.

Marginal Tax Rates

When distributing income on a standard company structure, you’ll get the company tax rate of around 30%, but the amount paid out to the director will follow the personal tax rate. Hence, your taxes may be larger than splitting income under a trust business structure.

Furthermore, the trustee can split your profit under marginal tax rates in a trustee, leveraging marginal tax rates to reduce the total tax payables. You can also get away with income tax if you’re distributing it to adult resident members/beneficiaries.

Ideal for Passive Investment

If you’re earning passive income from a rental or commercial property, holding it in a trust should be a good idea. Not only will you benefit from positively-geared assets, but you can also leverage marginal tax rates through a trust business structure.

Discounts on Capital Gains Tax (CGT)

If you can hold your trust assets for more than a year, the trust will qualify for discounts on capital gains tax for as much as 50%. However, this only applies to discretionary trusts and for individual (non-company) beneficiaries.

Absolute freedom over income

As soon as you receive your share of profit, you have absolute freedom over what you’ll do with it.

Disadvantages of a trust business structure

You can get liability in some cases

A trust is just as strong as its trustee (the company). If they get into financial problems that may cause the trust to fail its repayments, lenders may turn into the beneficiaries as recourse.

Hence, a trust business structure best applies to companies and businesses in a strong financial position and has reliable profit streams.

Limited lifespan

Most trust business structures will have about 80 years of lifespan per the Rule against Perpetuities, while that rule varies across Australian regions.

Trust funds can be complex

A trust business structure adds more complicated layers to your business structure. Without a solicitor and accountant to back you up, running a trust can be complex and difficult.

Financing can be a challenge

Getting approved for a residential loan under a trust can be difficult because of lenders’ diverse rates and policies. Fortunately, our mortgage specialists are experts on trust loans and can help you find your ideal lender and get approved for lower rates.

Upfront and ongoing fees can be costly

Most trust funds would need at least $1000 to cover the set-up cost and ongoing fees. That includes accountancy and other professional fees, excluding the cost of filing the annual tax return.

Trustees need to pay personal taxes

If you’re planning to invest your trust fund for future commercial ventures or company expansion, you (as the trustee) may need to deal with personal taxes. That’s why it’s best to have a business/company as a trustee.

Is it easy to dismantle a trust?

When it comes to trust business structures, you can’t just exit the trust by selling it to another entity/party. A possible recourse is to sell the entire company (including the trust) with a solicitor’s approval and acquire the same business from the trust.

Your trust may also have approved licenses under the company or trustee, which is mostly non-transferrable. But transferring it to a company would be easier since you’re only selling the trust shares without losing the company and its properties.

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