It is in your best interest to start with the end in mind whenever you want to select the best business structure to adopt. There is some identifiable complexity in Australian tax laws, and you can end up triggering a ‘capital gains tax event’ when you change your business structure mid-stream; this can have a significant implication on your tax. It is, therefore, in your best interest to consult with professionals when you want to change business structure of when you need more information about your existing business structure.
Whenever the issue of alternative business structures come up for discussion, we make it a point to consider the following:
- Future Entitlement to Discount Capital Gains Tax Concessions
- Compliance with all Legal Requirements in Your Trade Or Industry
- The Possibility Of Admission Of a New Investor Or Business Partner
- Asset Protection Maximization
- Minimization of Income Tax
The risk profile of the particular industry you are operating in, the present tax position of your existing stakeholders and the anticipated profitability of that business are other very important factors that are considered. You may find out that your business is based on the combination of all these factors.
Australia plays host to varieties of business structures. However, the family trust, company, partnership and sole trader are the four most common other business structures present here. The ATO is presently bringing about a crackdown on any taxpayer having trust arrangements; this is why this write-up will focus more on the family trust option.
What is a trust? It is a legal relationship in which an individual, called the trustee, is holding an asset for one or several other individuals that are referred to as the beneficiaries. When the person acting as trustee is accorded the discretion and power to decide the particular beneficiary to benefit from income distribution and other aspects of the trust, this is referred to as a discretionary trust. It is one of the mandates of the trustee to carry out every obligation and transaction on behalf of the beneficiaries, and there are legal responsibilities attached to this function. The Trustee can be a company to limit liability in many cases.
A family or discretion trust can provide the following:
- Asset Protection: The assets owned by the beneficiaries of a trust are not similar to the assets owned by a discretionary trust. If the beneficiary is bankrupt or sued, the trust can, therefore, be protected from creditors.
- Tax Minimization: There can be minimization in the overall tax payment made by a family group by distributing various classes of income to different beneficiaries and by distributing capital and income to beneficiaries that are only lower marginal tax rates. It is mandated that each of the beneficiaries pay tax at their marginal rates on the income distribution they have received in any of the financial years from that trust.
- Carry Forward Losses: Losses can be carried forward by a discretionary trust in certain circumstances.
- Capital gains Tax Discount: A discretionary trust has an entitlement to up to a discount of 50% on the capital gains made when any asset initially held by the discretionary trust is disposed of for more than 12 months. Companies are not entitled to this discount, except individuals.
- A Mechanism designed for passing family assets over to the future generations.
Seven steps are involved in the process of setting up a family discretionary trust:
- Select a trustee: The trustee can be from a company set up specifically for that purpose, or it can be a private individual
- Prepare family/ discretionary trust deed: The deed contains the terms and conditions guiding the setup and maintenance of the family trust
- Settle the trust: It must be signed by the settler, and he/she is required to give a sum as an initial settlement to the trustee. The sum of money can be paid by cheque or by cash
- The trustee signs the Trust Deed: The trustee will agree to the terms and conditions surrounding the agreement by signing the Trust Deed.
- Stamping: the trustee may have to pay state-based stamp deed on the trust deed. The amount payable differs from one state to another.
- Apply for TFN and ABN: Trust is not seen as a separate legal entity in general law. However, they are thus recognized for taxation.
- Open a bank account: The bank account should be opened in the name of the trustee for the trust. Before opening the bank account, the bank will request for the trust ABN.