When it comes to your new business venture, it is important to seek advice on how best to structure your business from a taxation point of view. One of the structures we recommend to our clients is using a Discretionary Family Trust with a Corporate Trustee.
The main reasons for using discretionary family trusts is they allow for flexibility of distributions of income and the main benefit of using corporate trustees is they offer protection of your non-business assets.
Listed below are the main advantages and disadvantages with structuring your business this way.
Advantages – Discretionary Trusts
1. Ultimate asset protection when a corporate trustee. Not only are the principal’s personal assets protected from creditors of the trust, but the business is protected from the principal’s personal creditors. Unlike a company or unit trust where the shares or units of the principal are assets of the principal which form part of the principal’s bankrupt estate.
2. Less regulation than a company.
3. Flexible distributions allow income splitting.
4. Income can be distributed to a bucket company to be taxed at the corporate tax rate.
5. The trust deed can allow flexible distributions of capital.
6. The trust can employ the principals and provide salary packaging.
7. The trust can employ the principals and provide employer sponsored superannuation.
8. The trustee can vary distributions among family member according to their needs.
9. The trust deed can be tailored to suit the needs of the principals and other beneficiaries.
10. No need to lodge annual returns and other forms with ASIC.
11. The 50% CGT discount is available.
12. Easy to manufacture a controlling individual.
13. Easy to introduce new beneficiaries, provided they are within the range of objects.
14. Able to stream income to minimise tax.
15. Loans can be made to beneficiaries without tax implications unless an unpaid present entitlement to a company exists.
16. Section 65 and 109 of ITAA 1936 do not apply.
17. Generally tax free distributions can be made to beneficiaries without CGT event E4 happening.
18. Generally easy to wind up.
19. On a winding up, there is no equivalent to Section 47 of ITAA 1936 for companies.
20. Control can be easily transferred by changing trustee and/or the appointor.
21. The general value shifting rules should not apply.
Disadvantages – Discretionary Trusts
1. They are complex and not many people understand precisely how they work.
2. Costly to establish.
3. Costly to run.
4. Ultimate beneficiary statement rules apply.
5. Cannot distribute losses to beneficiaries. Losses are trapped in the trust.
6. Complex trust loss rules apply.
7. Cannot transfer losses to other trusts unless comply with complex and restrictive consolidation rules.
8. May need to elect to be a ‘family trust’ to satisfy trust loss rules or to be able to distribute franked dividends to beneficiaries without adverse tax implications.
9. No perpetual existence, normally must be wound up within 80 years.
10. More difficult to satisfy conditions for the small business CGT concessions, in particular the controlling individual test each year to obtain the 15 year exemption.
11. Amendments to the trust deed could constitute a resettlement for CGT and stamp duty purposes.
12. If required to make a family trust election, then flexibility of distribution is restricted.
13. The trustees can be personally liable for the debts of the trust in some circumstances.
14. ATO dislikes trusts, so they have forever being targeted.
15. Beneficiaries do not have a transferable interest.
16. If a new partner is to be admitted to the business, it is not easy to give them a fixed interest.
17. Additional stamp duty and land tax implications depending on the state.
18. Income accumulated in the trust is taxed at the top marginal rate.
19. It is difficult for a beneficiary of a discretionary trust (that is not a family trust) to satisfy the 45 day holding period rule where the trust receives a franked dividend.
Please contact us if you require any further information or to request a quote to establish this type of structure.