Business Structures 101 – Trusts

When commencing a business venture, you will need to consider the most appropriate type of business structure to put in place to operate your business. Different business structures have different advantages and disadvantages.

This article looks at trusts – what they are, how to set up a trust and the advantages and disadvantages of the trust structure. This article is the fourth in a series about business structures (see part one here, part two here, and part three here.)

Key features

A trust is effectively an obligation imposed on a person (the trustee) to hold property or income for the benefit of others (the beneficiaries). The trustee is responsible for the operation of the trust.

A trustee can be one or more individual(s), or a company. There are a number of laws which govern how a trustee must perform his or her obligations to the trust. The primary obligation of a trustee is to act in the best interests of the beneficiaries of the trust.

Trusts are set up for a number of reasons, including family and charitable purposes. For business purposes, the most common types of trusts are:

  • Discretionary trusts (also called a family trust): The trustees of a discretionary trust are able to distribute income and capital gains to beneficiaries in whatever way they desire. There is no fixed entitlement for each and every beneficiary.
  • Unit trusts: A unit trust is similar to a company, where the trust property is divided into a number of shares called “units”. The number of units held by each beneficiary determines his or her entitlement to a share of the assets and income of the unit trust.
  • Hybrid trusts: These are essentially a combination of a discretionary trust and a unit trust. Beneficiaries hold a defined amount of units but the trustee has the discretion to vary each beneficiary’s entitlements and income.

How to set up a trust

A formal deed is usually required to set up a trust. A trust deed outlines the purpose of a trust, the beneficiaries of the trust, the trustee, the property involved, the rights and obligations of the trustee and the beneficiaries, and how assets will be distributed to the beneficiaries.

It is important that the trust deed is drafted correctly, therefore, it is a good idea to engage a solicitor to prepare your trust deed.

in order to carry out a business, a trust must:

  1. have its own Australian Business Number (ABN), which can be obtained online through the Australian Business Register;
  2. have its own Tax File Number (TFN), which can also be obtained online from the ATO; and
  3. be registered for GST if the annual turnover of the trust is $75,000 or more.

Trusts that operate a business must complete a tax return, showing the income the trust earns, deductions it claims and the amount of income distributed to each beneficiary.

Advantages and disadvantages

The advantages of a trust structure include:

  • Flexibility in how income is distributed
  • Tax planning flexibility, including income splitting
  • Beneficiaries of a trust pay tax on the income they receive from the trust at their own marginal tax rates
  • Asset protection
  • Beneficiaries are generally not liable for the debts of a trust
  • A trust is more private than a company

The disadvantages include:

  • A trust is a complex legal structure, which can be costly to set up and run
  • There are considerable legal and compliance requirements for setting up and operating a trust
  • Trusts can be somewhat inflexible because the trustee’s powers are restricted by the trust deed and the law
  • It can be difficult to make changes to the structure once it is set up

Conclusion

A trust might be an appropriate structure if a business venture will involve a sizeable amount of property and money. That is because a trust can be beneficial in protecting assets and minimising taxation obligations. Trusts are also a common structure choice for family businesses because various family members can be made beneficiaries of the trust that is operating the business.

A trust is the most complex of all the business structures, with complicated tax implications, and legal and compliance requirements. As such, it is highly recommended that advice is sought from a solicitor to check whether a trust suits your circumstances.

If you or someone you know wants more information or needs help or advice, please contact us.

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