Changing rules for Trusts
A lot of family businesses use discretionary trust structures. These have been popular because they provide both a level of risk management, separating the business from your personal assets and are also quite tax efficient.
A discretionary trust allows the trustee to appoint the income of the trust (this is typically the profit of the business) to any of its beneficiaries in the proportions that it determines from year to year. The entitlement of the beneficiary is not fixed, rather it is a decision of the trustee each year. Normally the trustee is either the key person in the business or a company controlled by this person.
In a typical family situation, Mum and Dad may be the trustees or directors of the trustee company. Using this structure business owners have the flexibility to distribute income in the most tax efficient way. None of this has changed.
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Essential to appoint Trust income
Q. I read your recent comments regarding some of the tax differences between operating a business through a company or trust structure. We use a family trust and a friend has told me it is important to distribute the trust income at the end of each year. Can you clarify what he is talking about?
A. I assume your family trust is a discretionary trust. Subject to the terms of the trust deed this should allow the trustee to decide each year who they are going to appoint the income to. This creates the flexibility of income distribution that we spoke about last week. Once the trustee has resolved who will be entitled to the income of the trust, then that person or entity is taxed on that share of the income.
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2010/2011 Need to Know – Mine or yours? Taking cash out of and into your business
The Tax Office is very interested in the way business owner’s access money from their businesses. Trusts are currently in the spotlight.
A common approach utilised by many businesses with a discretionary trust is to distribute income to a company, pay tax at the corporate tax rate but leave the distribution in the trust for use by the business owners. In effect, the distribution only occurs on paper. Owners then use the distribution as working capital to fund growth, or in some cases, to fund personal assets. The Tax Office intends to tax any of these distributions that remain within the trust (called unpaid present entitlements) under Division 7A.
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