Tax Benefits Of Managing Your Business As Trust

As the owner of your business, you have the right to choose the operating structure under which you may run your business. You may run your business under a sole trader, a partnership, a one-company structure or a two-company structure, or a trust. The different structure offers different benefits and you have to choose quite by seeing and analyzing all those pros and cons, wisely.

How does a business run through trust look like?

If you want to run your business through a trust, you need a trustee.  The trustee can own and operate the business’s assets. The trustee can also distribute the business’ income and comply with the trust deed’s obligations as well. One thing you should keep in mind that, unlike companies, trusts cannot be treated as a separate legal entity. 

It is the trustee of the trust who is to be treated as the legal entity, who can own the assets and sign contracts on behalf of the trust. To set up a trust, you need to follow a few steps which are selecting a trustee, having drafted a trust deed, getting a settler to settle your trust, and completing payment of any applicable stamp duty.

What are the different types of trusts you may use to run your business?

There are two types of trust that you may use to run your business. These are as follows:

  1. Discretionary trust: In the case of a discretionary trust, the trustee can decide about the discretion over what income or capital can be distributed to each of the beneficiaries. Let us take an example. If, say, there are two beneficiaries of the trust, and the trustee does not need to distribute the income equal (i.e. 50% to each of them). He can give 70% to one beneficiary and 30% to another. The percentage of amount changes depending on the distribution. 

The discretionary trust is associated with a discount on any capital gain made from the disposal of any of the assets the trust has held for a time period of 12 months or more. Any individual, who holds shares, can get access to this discount. But, you have to keep in mind that, this discount is not available for companies who hold the shares.

Discretionary trusts are quite common for business companies that are run by a single family because in that case, the occurrence of any unwanted incident regarding discretion made by the trustee is less likely to happen. But it is less appropriate for a business that has two or more independent owners because distrust may occur regarding receiving the income.

  1. Unit trust: Unlike a discretionary trust, in the case of a unit trust, the property is divided into fixed parts. Just as the shareholders subscribe to the company, the beneficiaries subscribe to the units. One of the advantages of having a unit trust is that it assures the holders of receiving the exact sum of money. Say, if you have two holders who each own 50% of the shares, they will get that exact sum of 50%. Whether the money distributed to a unit trust can be taxable that completely depends on the character of the money.

What are the advantages of a trust?

There are certain advantages of setting up a trust. These are as follows:

  1. The total income can be distributed to the beneficiaries at the trustee’s discretion and that also at the lowest marginal tax rate in order to reduce the aggregate tax beneficiaries pay.

  2. The beneficiaries of a trust can pay on income at their own marginal tax rate.

  3. If your trust is discretionary, a trustee can distribute the income at his/her own discretion.

  4. Most importantly, your business privacy will be maintained more in case of a trust structure, in contrast to a company structure.

  5. The trust assets are not owned by the trust beneficiaries. So, these valuable assets can be protected from any third-party creditor of the beneficiaries.

  6. But, for a unit trust, it may happen that a beneficiary becomes bankrupt. Then the unit owned by him will be treated like any other asset and can be accessed by a third-party creditor.

What are the tax benefits you may get when you use a trust to run your business?

For the necessary tax return, you may file for it through an online portal. Trust tax return is now available in preferred document format on the official website of the Australian government. There are certain tax benefits you may get while registering a trust for the purpose of running your business.

  1. Capital gain exemption: This is applicable for a family trust. This is the most important benefit of a family trust that you may get related to capital gains. If you own a small business that passes through eligible tests, you may get lifetime capital gains exemption when your shares will be sold, from which your family members may also be benefitted. But, if the business’s common shares are held by a trust, the growth in the share values is also held by the trust. Now, if these shares are sold in the future, the value gained from them can be easily distributed among different beneficiaries. If you maximize the exemption across the family members, you can easily reduce the amount of tax to be paid on the capital gain.

  2. Splitting of income: If you have a spouse and children over 17 years of age, there is an opportunity to split the income. Your family trust can be paid dividends, as it holds the company’s shares. These dividends can be shown by income and can be used in paying university fees and others. Taxes can be reduced overall by spreading the dividends.

  3. Asset protection: Asset protection is more associated with the registration of your business as a company. But, it can also be done in trust, if your trust uses a corporate trustee, rather than an individual trustee.

  4. Delayed taxation in case of death of a beneficiary: If one of the beneficiaries of your family trust dies, then you may delay in paying taxes. If a family trust holds shares of an operating company, the death of a beneficiary doesn’t create a tax liability.

Ending note

If you have more queries to ask regarding paying for taxes in Perth, you may consult a tax accountant Perth who can clearly tell you whether you will require a discretionary trust or a unit trust and the pros and cons of each.