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.
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.
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:
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.
The trust deed is the core foundation of every trust business structure that explains:
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.
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.
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.
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.
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.
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.
As soon as you receive your share of profit, you have absolute freedom over what you’ll do with it.
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.
Most trust business structures will have about 80 years of lifespan per the Rule against Perpetuities, while that rule varies across Australian regions.
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.
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.
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.
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.
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.
Applying for a commercial loan under your trust can be easier with the help of a professional mortgage broker. Our specialist brokers at Plan A Mortgage will help you look for and negotiate the best rates with the right lender.
Feel free to speak with us at 1300 052 055 and discover your commercial loan options for your business today!