In essence, a trust business structure is used to help minimise liability. It is done by putting a trustee in charge of the administration of the assets for it. The trustee can be an individual, a member, or even a company. They are set up like this because the trustee becomes personally liable for the debts of the trust. By structuring the business this way, we can reduce the risk of liability for the director to incur personal debts.
A trust is a separate legal entity. A trust is set up to hold the assets for a person or company. We do this to minimise tax and increase asset protection.
Okay, so this gets interesting. There are a few roles involved in a trust structure, although none of them are a director. You have a settlor, trustee, appointer and beneficiaries.
The Settlor is the person responsible for settling the money into the trust, this person is not allowed to be a beneficiary of the trust and is usually the accountant or lawyer.
So this person is the person that is the legal owner of the trust’s assets including money and property. The trustee carries out transactions on behalf of the trust, in the best interest of the beneficiaries.
The appointer has the power to replace the trustee. Some common instances are in the case of death, bankruptcy or incapacitation.
The beneficiaries are the people named in the trust deed. They will receive distributed income or capital. The trustee decides how or what to distribute to beneficiaries.
A trust requires a trust deed. The trust deed will outline the terms and conditions of the trust. It includes people’s positions (such as your beneficiaries and trustees). It outlines what the trust can invest in, whether they can borrow, how they do it, etc.
The trustee is personally responsible for the debts of the business. However, in saying this, because the trustee is responsible for the trading of the trust, they can use the assets held within the trust to pay off the debts.
Let’s talk about tax
A trust requires a separate Tax File Number and ABN, and as such prepares and lodges its own tax return. Whilst this is the case, the trust doesn’t actually pay tax. Sounds good doesn’t it? Instead the tax is diverted to the beneficiaries of the trust. So no, there’s no getting out of it I’m afraid.
When it comes to GST, it’s only applied to the trust if its annual turnover is $75,000 +.
If the trust has employees registered under it then it is liable for make PAYG instalments, as well as superannuation contributions for its employees.
EXAMPLE OF HOW A TRUST STRUCTURE WORKS TO MINIMISE TAX
Whilst the trust is the legal owner of the assets, the director of the trustee company is usually a beneficiary of the trust. This means that the profits that the trust has made can be distributed to the director. It can also be distributed to other beneficiaries like a business partner or family members. Doing this can help to minimise the amount of tax paid on the profits. Because the trust isn’t taxed, the profits are taxed to the individual at the respective tax bracket the beneficiary is currently in. Hopefully this will assist moving the director from the highest tax bracket so that they’re not paying 47% tax on their income.
We use trusts as a way of protecting assets too.
The way your business structure is set up can have a major impact on the amount of tax you pay. In some cases, creating more entities and diverting profits can have an impact on the tax bracket you’re sitting in.
Ia a trust business structure the best fit for you?
- Do you run a business that is profitable?
- Is the turnover of the business significant?
- Are you currently or close to sitting in the highest tax bracket?
- Do you have other people close to you that can be used to distribute funds to and save tax?
If you answered yes to all of the above questions, then maybe it’s worth having a chat with us to make sure that this is the right route for you and your business. You can also get personalised advice on your business structure to evaluate its tax effectiveness and asset protection ability.
If you would like some more information about the tax obligations of a trust business structure you can give us a call and we can talk you through the best solution for your business, or you read up on it more on the ATO website here.