Everything You Need to Know About Trust Business Structures in Australia
Have you noticed how effortlessly your friend’s business is managed as compared to all other small businesses? Well, it might just be because they’ve set up a trust structure. Now, before you start thinking this is some fancy financial ‘non-sense’, let’s break it down to the meaning of all these. We’re going to explore the ins and outs of trust business structures in Australia, and by the end of this article, you’ll be as clued up as a Fitzroy hipster on the coffee trends.
What is a Trust?
Alright, let’s start with the basics. In the business world, a trust is like a protective bubble for your assets and income. It’s a legal arrangement in which a person (called a trustee) holds and manages assets or property on behalf of another person or group (called beneficiaries).
Picture this: You have an awesome AFL memorabilia collection. Instead of keeping it in your garage where your kids might use your signed Dustin Martin guernsey as a painting smock, you decide to entrust it to your responsible friend. They look after it, but it’s still for the benefit of you and your family. That’s kind of how a trust works in business.
The key components and roles involved in the structure of a trust are:
1. The Trustee: This is the individual or corporation in charge of managing the trust’s assets and affairs.
2. The Beneficiaries: These are the people or organizations who benefit from the trust.
3. The Trust Property: This includes all assets held by the trust.
4. The Trust Deed: This is the legal document that governs how the trust functions.
For a more detailed explanation of business structures, including trusts, check out Future Advisory’s guide on choosing the best business structure. You can also find more information on the Australian Government’s business website
Terms You Need to Know Before Starting A Trust
Before we dive deeper into the world of trusts, let’s familiarise ourselves with some key terms. Consider this as your trust structure basic guide – it will be useful when you are having a conversation with your accountant over a flat white.
1. The Settlor: This is the person who establishes the trust and transfers the initial assets into it. It’s similar to how someone starts a game of backyard cricket – they set everything up, step back, and let the game begin.
2. The Trustee: The trustee is the legal owner of the trust’s assets and is in charge of managing the trust in accordance with the trust deed and for the benefit of its beneficiaries. It’s a bit like being the captain of a footy team – you’re in charge, but you’re working for the benefit of the whole team.
3. The Beneficiary or Beneficiaries: These are the individuals or entities who benefit from the trust. They’re like the spectators at a BBQ – they don’t run the show, but they get to enjoy the results.
4. The Trust Deed: This is the rulebook for the trust. It sets out how the trust should operate, who the beneficiaries are, and what powers the trustee has. It’s as important as the rules in AFL – without it, chaos would ensue.
5. The Appointor: This individual has the authority to dismiss and appoint trustees. They’re like the coach of a footy team – they don’t play the game, but they have the power to change who’s on the field.
These definitions are based on information from the Law Society of NSW (https://www.lawsociety.com.au/for-the-public/know-your-rights/trust/how-trust-works), a reliable source for legal information in Australia.
08 Types of Trusts Used in Australia
Now that we’ve got the basics sorted, let’s look at the different types of trusts you might come across in Australia. It’s like walking into a pub and seeing all the different beers on tap – each has its own characteristics and suits different tastes.
Discretionary Trust
This is one of the most common types of trusts used by small businesses in Australia. The trustee has the discretion to decide how the trust’s income and capital are distributed among beneficiaries. It’s like being the BBQ master – you get to decide who gets what portion of the snags.
Example: The Smith Family Trust is set up as a discretionary trust. At the end of the financial year, the trustee can decide to distribute more income to family members with lower tax rates, potentially reducing the overall tax paid by the family.
Fixed Trusts
In a fixed trust, the beneficiaries’ entitlements are fixed and predetermined. It’s like buying tickets to the footy – you know exactly which seat you’re getting.
Example: A property trust where each beneficiary is entitled to a specific percentage of the rental income and capital gains.
Unit Trusts
Unit trusts are similar to fixed trusts, but the beneficiaries’ interests are divided into units, much like shares in a company. It’s a bit like owning a slice of a really good pizza – the more slices (units) you have, the bigger your share.
Example: An investment trust where investors buy units, and returns are distributed based on the number of units held.
Hybrid Trusts
These trusts combine elements of different trust types. They’re like a fusion restaurant – a bit of this, a bit of that, creating something unique.
Example: A trust that has both fixed entitlements for some beneficiaries and discretionary distributions for others.
Testamentary Trusts
These are created in a will and come into effect after the will-maker’s death. It’s like leaving a legacy playbook for your family after you’ve kicked the bucket.
Example: A trust set up in a will to manage assets for minor children until they reach a certain age.
Charitable Trusts
As the name suggests, these trusts are set up for charitable purposes. It’s like running a sausage sizzle, but on a much grander scale.
Example: The Salvation Army operates as a charitable trust, using its funds for various community services.
Superannuation Trusts
These trusts are specifically designed to hold and manage superannuation funds. They’re like a piggy bank for your retirement – but with a lot more rules and regulations.
Example: Your employer’s default super fund is likely set up as a superannuation trust.
Bare Trusts
In a bare trust, the trustee has no active duties beyond transferring the trust property to the beneficiary when instructed. It’s like being a delivery driver – your job is simply to get the package from A to B.
Example: A trust set up to hold a property for a child until they reach 18.
Why Should Small Businesses Use Trust?
And now you might be thinking, “This all sounds very confusing, why would I even consider setting up a trust for my small business?” Well, let us put it this way, there are some pretty good reasons why why a number of small business owners in Australia have turned to using trusts
1. Reduced Liability: If you set up your trust with a corporate trustee (that’s a company acting as the trustee), you can significantly reduce your personal liability. It’s similar to a biker wearing a helmet: if something goes wrong, you’ve got an extra layer of protection.
2. Asset Protection: If you place your assets in a trust, creditors or even legal claims against your company will be unable to harm them. It’s like putting your valuables in a safe – they’re harder for others to get their hands on.
3. Flexibility of Asset and Income Distribution: Trusts, especially discretionary trusts, offer a wide range of income and asset distribution options. This can be particularly useful for tax planning.
According to a 2021 report by the Australian Taxation Office, approximately 5% of Australian small businesses operate through a trust structure, highlighting its growing popularity among savvy business owners.
How Trust Business Structure Is Superior to Normal Company Structure
Now, you might be wondering, “Why not just set up a normal company?” Well, in many cases, a trust structure can offer some significant advantages over a standard company structure. Let’s break it down:
1. Tax Planning: Trusts can offer more flexibility in distributing income to beneficiaries, potentially resulting in lower overall tax. Companies, on the other hand, are taxed at a flat rate.
2. Asset Protection: While companies offer some asset protection, trusts can provide an additional layer of security, especially for personal assets.
3. Estate Planning: Trusts can be an effective tool for passing on wealth to future generations, something that’s not as straightforward with a company structure.
4. Privacy: Trust structures generally offer more privacy than companies, whose details are publicly available through ASIC.
Here’s a quick comparison table to unddestand the differences:
| Trust Structure | Company Structure | |
| Ownership | Beneficiaries have beneficial interest but don’t own assets | Shareholders own the company |
| Liability | Trustees can be personally liable (unless protected by trust deed) | Shareholders have limited liability |
| Taxation | Income distributed to beneficiaries is taxed at their marginal rates | Company pays tax on profits; dividends taxed in shareholders’ hands |
| Flexibility | More flexible in terms of income distribution and asset management | Less flexible, governed by corporate laws |
| Privacy | Generally more private than a company | Publicly available information for companies |
| Legal Structure | Governed by trust deed | Governed by corporate laws |
| Suitable for | Estate planning, asset protection, tax minimisation | Business operations, capital raising, limited liability |
Setting up a Trust Business Structure in Australia
Alright, so you’re sold on the idea of a trust for your business. But how do you actually go about setting one up? Don’t worry, we’ve got you covered. Here’s a rundown of what you need to know:
Legal Requirements and Documentation for Trust Formation
Setting up a trust isn’t as simple as deciding to have a barbie on a Sunday afternoon. There are some legal hoops you’ll need to jump through:
1. Trust Deed: This is the big one. You’ll need a properly drafted trust deed that sets out the rules of your trust. It’s like the constitution for your trust.
2. Settlor: You’ll need someone to act as the settlor. They’ll sign the trust deed and provide a small sum (often $10) to establish the trust.
3. Trustee: You’ll need to appoint a trustee. This can be an individual or a company.
4. ABN and TFN: You’ll need to apply for an Australian Business Number (ABN) and Tax File Number (TFN) for your trust.
5. Bank Account: You’ll need to set up a separate bank account for the trust.
The Role of Trustees and Beneficiaries
In a trust structure, the roles of trustees and beneficiaries are crucial:
Trustees:
– Manage the trust’s assets
– Make decisions about distributions
– Ensure the trust complies with all relevant laws and regulations
Beneficiaries:
– Receive distributions from the trust
– May have rights to information about the trust’s activities
Costs Involved in Establishing and Maintaining a Trust
Setting up and running a trust isn’t free, mate. Here are some costs you might encounter:
– Legal fees for drafting the trust deed (typically $1,000 – $5,000)
– Accounting fees for annual tax returns and financial statements (varies, but budget for at least $2,000 per year)
– Potential stamp duty on the transfer of assets into the trust (varies by state)
– Ongoing compliance costs
According to a 2022 survey by the Institute of Public Accountants, the average cost of setting up a trust in Australia is around $3,500, with annual maintenance costs averaging $2,500.
How to Transition from Another Business Structure to a Trust
Maybe you’ve already got your business up and running, but you’re thinking a trust structure might be a better fit. No worries – it’s possible to transition, but there are a few things to consider.
When to Change Business Structure to a Trust
You might consider changing to a trust structure when:
1. Your business has grown significantly and you need better asset protection
2. You’re looking for more flexibility in distributing income
3. You’re planning for succession or estate planning
Steps to Transitioning Your Business to a Trust Structure
1. Seek Professional Advice: This is crucial. Chat with your accountant and a lawyer who specialises in business structures.
2. Valuation: Get a proper valuation of your business assets.
3. Create the Trust: Set up the new trust structure.
4. Transfer Assets: Transfer the business assets to the new trust. Be aware this might trigger capital gains tax or stamp duty.
5. Update Registrations: Update your ABN, GST registration, and any other business registrations.
6. Notify Stakeholders: Let your customers, suppliers, and employees know about the change.
7. Update Contracts: Review and update any contracts or agreements in the new trust’s name.
Remember, transitioning to a trust isn’t a decision to be taken lightly. As stated in a 2023 report published by CPA Australia, around 15% of small businesses that change their structure opt for a trust, due to its flexibility in taxation and protection of assets
In conclusion, trust structures can offer significant benefits for many Australian small businesses, but they’re not a one-size-fits-all solution. They come with their own complexities and costs, so it’s crucial to get professional advice before making the leap.
So, there you have it – everything you need to know about trust business structures in Australia, served up with a side of true blue Aussie flavour. Whether you’re a tradie in Toorak or a Sydney startup, understanding your options when it comes to business structures is crucial. And remember, just like choosing between a meat pie and a sausage roll, the right choice depends on your specific situation.
Got questions about whether a trust structure might be right for your business? Why not give us a call?
