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A trust is simply an agreement whereby a person or company agrees to hold an asset for the benefit of the others. The person who controls the asset is known as the ‘trustee’ and those who benefit are called the ‘beneficiaries’. The assets held in a trust can vary – from property, shares, a business and business premise to works or art and so on. You, the creator of the trust sets out the specific terms as to how you want these assets managed in a document called the “trust deed”.
By transferring or buying assets in a trust, you don’t own the assets in your name. The assets are legally controlled by the trustee. However, you control exactly how they’re managed now and in the future. So regardless of what happens in life, your assets are protected from loss.
Trust being used for business or investment purposes generally require an ABN and TFN because they have a requirement to lodge a tax return. In most cases it is not the trust that incurs a tax liability but the beneficiaries of the trust must report the distribution they received.
Unsure of what income and expenses you should bring in for you appointment?
Please feel free to refer to our Trust Tax Checklist.
A family trust (also known as a discretionary trust) is the most common trust used by small to medium size business owners, investors and medical professionals in Australia. They are generally set up to hold a family’s assets and/or business for the benefit of providing asset protection and tax planning for family members.
From a tax perspective the main advantage is that any income generated by the trust from business activities and investments, including capital gains can be distributed to beneficiaries in low tax brackets to significantly reduce taxes. The income distribution is discretionary, which means, no beneficiary is entitled to receive income or capital it is the trustees that have the discretion as to what they receive, The trust assets can also be transferred from generation to generation tax and stamp duty free.
A unit trust is like a company where the trusts property (business or investments) are divided into a number of shares called units. The number of units you hold will determine your entitlement to your share of income, capital gains and voting power.
The taxation benefits are generally not as flexible as a discretionary trust in that any income distributions must be distributed to unit holders as per their share of units. However if a discretionary trust was a unit holder you can achieve the same flow through tax benefits.
From an asset protection point of view, unit trusts don’t provide the same kind of asset protection as a discretionary trust. If a unit holder is made bankrupt, then that persons units will be treated like any other assets and sold to raise funds to pay creditors.
A hybrid trust takes the best features of a discretionary trust and the best features of a unit trust and puts them into one. This means that the trustee has the discretion to distribute benefits to the beneficiaries of the trust – to beneficiaries who are on low tax rates, as well as have unit holders who are absolutely entitles to a portion of the benefits.