Business owners may be familiar with some of the operational structures that they can choose to run their business, such as sole trader, partnership or a company structure. A trust arrangement is another business structure that you may wish to consider.
A client recently asked our business team if a trust would be advantageous for their particular business. Gerald Santucci, Director with Snedden Hall & Gallop Lawyers, discusses a trust as a business structure.
What is a trust?
A trust is a legal relationship where one person (the trustee) holds or invests assets and property (the trust assets) for the benefit of another person (the beneficiary). The trustee deals with trust assets in accordance with specific terms set out in a trust deed, which is subject to the trust legislation of the state or territory. The trust deed is the document that governs the trust arrangement – it sets out the objectives of the trust, the beneficiaries, and the powers and restrictions of the trustee to manage the trust and its assets.
What are the different types of trusts?
There are a number of different trust structures to choose from. These include a discretionary trust, unit trust or hybrid trust.
- Discretionary trust – This is a type of trust where the trustee is given absolute discretion to distribute income or trust property to beneficiaries in whatever manner the trustee chooses. A common small business arrangement in the case of family businesses is a discretionary family trust, in which the trust is designed to benefit family members by sharing their tax burdens and protecting family assets.
- Unit trust – This is an arrangement in which distributions from the trust are made to the beneficiaries in fixed proportions. This arrangement is suitable when a number of unrelated families and/or individuals are to receive income produced by a business or investment. The unit holders each have individual contracts with the trustee. Unit holders in the trust often have the right to vote at meetings on matters such as the removal and appointment of new trustees.
- Hybrid trust – This type of trust has elements of both a discretionary trust and a unit trust.
What are the advantages of using a trust?
- Ease of creation – A trust arrangement is established through a trust deed and so is relatively simple to set up.
- Confidentiality – Trust business operations remain confidential. The trustee is not required to lodge financial reports to ASIC like a company. (The trustee is required to lodge tax returns with the ATO.)
- Protection – There is a degree of separation between the trust assets, the company carrying on the business and the individuals who will ultimately benefit from the company which protects the assets. As beneficiaries do not actually own the trust assets, those assets are not at risk due to debts incurred by, or legal action against, a beneficiary.
- Flexibility – In the case of discretionary trusts especially, they offer flexibility for tax planning purposes as it enables income to be split between the beneficiaries and can vary how this is done each financial year.
What are the disadvantages of using a trust?
- Cost – Trust structures may be more complex and costly to establish and maintain than a company structure. If money is not distributed each financial year, any undistributed residual income will be taxed at the highest marginal rate.
- Tax – Losses cannot be distributed, only profits.
- Decision making – Beneficiaries have no authority to direct a trustee on the management of the trust. This is why parties must enter into a clearly defined trust deed.
- Trustee liability – A trustee acting in a personal capacity may be liable for trust debts (subject to the deed).
- Duties – Trustees have a number of duties including becoming familiar with the terms of the trust, maintaining trust records, investing according to the trust deed rules and acting in good faith and in the best interests of the beneficiaries.
Who would benefit from using a trust?
In a small-to-medium sized family-owned business, a trust may be a tax-effective structure. Profits of the business may be distributed to family members, as beneficiaries.
Of course, your individual circumstances need to be considered to ensure the most effective structure is used for you and your business.
How can Snedden Hall & Gallop assist?
We can review your business goals and your personal needs and help you in creating the right structure for you. Given that there are a number of different trust structures to choose from, we will help you understand what will work best for you.
Contact Gerald and our business team by email or by phone on (02) 6285 8000.
Gerald thanks Senior Law Clerk, Gene Schirripa for his work on this blog.