Trusts are commonly used business structures which operate for a listed class of people and/or entities (beneficiaries). The management, operation and administration of any assets which are held by a trust are conducted by the trustee of the trust. Trustees are ordinarily either individuals (in their personal capacity) or a corporate entity.
There are several advantages to utilising a trust through which you conduct your business:
1. Tax advantages
A decision to run a business using a trust structure is often driven by tax considerations. One of the main advantages over a typical company structure is that a trust is entitled to the general capital gains tax (CGT) discount. Further, a trust (unlike a company) is not itself taxed on any distributed income; rather, this income is taxed via each beneficiary's income, meaning that any profits from the trust can be distributed across any beneficiaries of the trust for more tax effective treatment.
2. Liability advantages
Trust structures also offer a level of protection against liability. This is because beneficiaries are not ordinarily liable for any debts of the trust – rather, those debts are borne by the trustee. This is of particular advantage where the trustee is a corporate entity, which provides a further level of protection against any liabilities which may be incurred.
Trusts are definitely more complex than a lot of other business structures and require some additional start-up costs in being established (such as stamp duty that may be imposed on the establishment of the trust - e.g. $500 in NSW). Additionally, the process of borrowing money as a trust is more complicated, as some lenders require all beneficiaries to be guarantors, which is potentially problematic in trusts with a large number of beneficiaries.
There are also some practical challenges when utilising trust structures. For instance, the duty of a trustee to distribute the trust income to the beneficiaries makes it more difficult to retain profits within the structure to provide capital for the future growth of the business.
The decision as to the vehicle that will be best to use to structure your business should always be made in collaboration with both your tax and your legal advisers.
Justin Fung is a lawyer and the Head of Commercial and Corporate in our Avant Law team. Justin has over 15 years’ experience advising in commercial, corporate, risk, compliance, governance, regulatory enforcement and dispute resolution and advises clients in the private and public sectors. He was previously General Counsel of a national allied health group of companies and held Group and Divisional Head of Legal roles in a major ASX-listed health company, whose operations covered medical and dental centres, allied health, pathology, diagnostic imaging, assisted reproductive technologies, day surgeries and hospitals. Prior to these in-house legal roles, Justin was an Executive Counsel with the global law firm Herbert Smith Freehills where he practiced for over 10 years.
Disclaimer: The information in this article does not constitute legal advice or other professional advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of this content. The information in this article is current to 26 October 2022.
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