We often get asked Should I setup a family trust? Or, should my business trade in a family trust structure? The short answer is that yes, family trusts are often an excellent structure in which to run a business or to invest.
The main advantages of a trust are:
- Perhaps the biggest advantage is that you have flexibility of where, or to whom, you distribute business or investment income. This means you can spread the income out among family members in a tax effective way and take advantage of tax free thresholds and marginal tax rates. Each year the trustee can assess family members positions and distribute income to them accordingly, with different distributions percentages each year depending on changing family circumstances.
- A trust is eligible for Capital Gains Tax Discounts similar to an individual. A company does not have access to all of these capital gains concessions.
- A trust has excellent asset protection. The legal nature of a trust is such that, a trustee controls and makes decisions for the trust, but does not actually own the trust. The assets in the trust are essentially a pool held for the benefit of beneficiaries, so that whilst they may get an income stream, no individual or beneficiary actually owns the assets of the trust. In cases of litigation this is a great protection.
The main disadvantages are:
- Since a trust distributes all its income to family members, a trust is not eligible for the recently reduced company tax rate (27.5% at the time of writing and scheduled to reduce to 25%). If you are a business that makes (or intends to make) a large amount of profit e.g. in excess of say 300K per year, and you intend to only take a portion of that profit and re-invest the balance of your profits back into the business for growth, then a trust structure may not be the best entity to trade in. You might consider trading in a company but with a family trust as shareholder.
- There is some level of added complexity in running a trust. There are often extra questions asked by suppliers or banks when you apply for credit and you also get asked extra questions when applying for licenses or permits with government and other regulatory bodies.
- A family trust is not eligible for the land tax threshold, meaning if the trust holds property it will pay land tax from dollar one (based on the assessed land value).
In summary, trusts definitely have strong advantages that should certainly be considered when choosing the correct vehicle in which to trade or invest. 3D Accounting are experienced experts in the field of choosing the right structure, so if you have any further questions on this subject feel free to contact us.