What is a Trust in a Business Structure?

A Trust is a business structure that allows an individual or entity (the trustee) to hold property or assets for the benefit of others (the beneficiaries). Trusts are commonly used in business for tax planning, asset protection, and to manage income distribution. The two main types of trusts are Discretionary Trusts and Unit Trusts.

A Discretionary Trust gives the trustee the power to decide how to distribute the income from business activities among the beneficiaries, typically family members. This structure allows for flexibility in income allocation, making it a popular choice for family businesses.

On the other hand, a Unit Trust is similar to a partnership or company, where units of the trust are owned by different individuals or entities. In this case, income is distributed based on the number of units held by each unit holder, akin to shareholders in a company.

Key Benefits of a Trust

1. Asset Protection
   Discretionary Trusts are often used to protect assets from potential future events such as bankruptcy, business failures, or personal relationship breakdowns. The assets of the trust are generally shielded from creditors, as they are held by the trust, not the beneficiaries.
2. Flexibility in Income Distribution
   A Discretionary Trust allows flexibility in allocating income to beneficiaries, which can help with tax planning. Beneficiaries can receive income based on their tax positions, potentially lowering the overall tax burden on the family.
3. Reduced Liability
   A trustee can be a company, which can reduce personal liability for the individuals involved in the trust. This means that personal assets are protected if the business faces legal issues or financial difficulties.
4. Tax Efficiency
   Trusts offer tax advantages, including the ability to distribute income in a tax-effective manner. In certain circumstances, distributing income to beneficiaries with lower tax rates can reduce the overall tax burden.

Key Liabilities and Drawbacks of a Trust

1. Complexity and Cost
   Setting up and managing a trust can be more complicated and expensive compared to simpler structures like sole traders or partnerships. Trusts require legal documents such as a Trust Deed, and ongoing compliance with legal and tax requirements.
2. Limited Loss Sharing
   While trusts allow income sharing among beneficiaries, they do not allow for loss sharing. If the business incurs losses, these cannot be passed onto beneficiaries for tax relief.
3. Tax on Retained Earnings
   If income is retained in the trust and not distributed to beneficiaries, it may be taxed at higher penalty rates. Trusts are generally designed to distribute income to avoid this issue.
4. Difficult to Alter
   Once established, it can be challenging to make changes to a trust, particularly when family members or children are involved. The structure is relatively rigid, and altering it may require legal processes.

Other Factors to Consider

Tax Requirements
The trustee of a trust must apply for a Tax File Number (TFN) and lodge an annual tax return. The trust itself does not pay tax. Instead, tax is levied on the trustee or beneficiaries who are entitled to the net income of the trust.

For more information regarding your tax obligations as a trust, visit the Australian Taxation Office (ATO) website.

Legal Responsibilities of the Trustee
The trustee is legally responsible for managing the trust and ensuring it meets its obligations. This includes distributing income to beneficiaries and adhering to the terms outlined in the Trust Deed. If the trust incurs debts, the trustee is responsible for paying those debts using the assets of the trust. If the trust’s assets are insufficient, the trustee may be personally liable for the remaining debts.

Choosing the Right Business Structure – Is a Trust the Right Option?

When deciding if a trust is the best structure for your business, consider the following factors:

• Licensing Requirements: What licenses will your business need?
• Tax Obligations: How much tax will you pay, and how can a trust impact your tax situation?
• Personal Liability: What level of personal liability are you comfortable with?
• Control: How much control do you want over the business, and how will this change with a trust?
• Ongoing Costs: What are the costs associated with maintaining a trust, including accounting and legal fees?

Business Structure Options in Australia

When choosing a business structure, there are several options available, including:

• Sole Trader: The simplest structure, offering full control but also full personal liability.
• Company: A separate legal entity that provides limited liability for shareholders.
• Partnership: A structure where two or more individuals share profits, losses, and liabilities.
• Trust: A structure where a trustee manages assets and distributes income to beneficiaries.

It is advisable to seek professional advice from a business consultant, lawyer, or accountant before choosing a business structure to ensure it meets your business and personal needs.