Business structures
Trust
A trust is an arrangement where a trustee holds assets or runs a business for beneficiaries under a trust deed, with its own tax file number and tax return.
A trust is not a separate legal person like a company. It is a relationship in which one party, the trustee, holds property or runs a business for the benefit of others, the beneficiaries. The trustee may be an individual or a company, and the rules for how the trust operates are set out in a trust deed. Trusts are used for family businesses, investment holdings and asset protection, and there are many types, such as discretionary trusts, unit trusts and hybrid trusts.
For tax purposes, a trust has its own tax file number and lodges a trust tax return. In general the trust is not taxed on its net income, provided that the income is fully distributed to beneficiaries each year, as the beneficiaries are then taxed on their share. Any income that is not distributed may be taxed at the trustee level, sometimes at the highest marginal rate. The detailed rules, including those on trust losses and distributions to related companies, are complex.
The trustee is the one who signs contracts, holds the ABN and carries legal liability. If the trustee is an individual, their personal assets may be at risk, and many trusts therefore use a company as trustee to limit exposure. The trustee has duties to follow the deed and to act in the interests of the beneficiaries, and breaches can have serious consequences.
GST obligations fall on the trustee, who registers the trust for GST using the trust's ABN, once GST turnover reaches $75,000 or if they choose to register earlier. The trust issues tax invoices and claims credits for business purchases as any other registrant would. Employees of a trust business are paid by the trustee, who withholds PAYG, pays super and deals with any state taxes, which are administered by state and territory authorities and vary by jurisdiction.
Setting up a trust involves costs, including a trust deed and, in some states, stamp duty on the deed, which is a state matter. Ongoing costs include accounting, a separate tax return and sometimes an annual resolution about distributions. Because the rules can change, trust arrangements should be reviewed periodically with a professional adviser.
A common misunderstanding is that a trust automatically saves tax. The tax result depends on who receives the income and their circumstances, and the ATO scrutinises arrangements that look like they are designed only to reduce tax. Another is that trust funds can be used freely by the trustee for personal expenses, which breaches the deed.
This is general information only, so confirm your situation with the ATO or a registered tax professional.
Worked example
The Nguyen Family Trust runs a small retail business. Net income for the year is $90,000. The trustee decides before 30 June to distribute $45,000 to each of two beneficiaries. The trust lodges a return showing the $90,000, and each beneficiary reports $45,000 in their own return and pays tax at their rates. The trust is registered for GST and lodges BAS in the trustee's capacity.
Practical tips
- Make distribution decisions, and write them down, by the time the trust deed requires, which is often 30 June.
- Consider using a company as trustee so personal assets are less exposed to business risk.
- Review the trust deed regularly, since outdated deeds can limit what the trustee is able to do.