A trust is an obligation on a person to hold assets for the benefit of others who are known as beneficiaries. It is the beneficiary that is taxed rather than the trustee. The beneficiary has to include their share of the trust’s net income in their personal tax return. Trust structures do not allow for any capital loss in the separate geared structure. Unsuccessful gearing can result in a total loss of the original investment without any tax deductions.
It is common for trusts to make a company "presently entitled" to trust income without actually paying out the money. In this way, the trust can accrue income taxed at the 30 per cent corporate rate, which can be distributed via an asset revaluation to individuals who can avoid paying the 48.5 per cent marginal rate.
Only 50% of the capital gains on an asset held by a trust for more than 12 months is taxable. A discretionary trust allows the trustee to distribute profits and franking credits freely.
Trusts are also cheap to setup and are not regulated by ASIC, and running costs are minimal.
Advantages:
Taxation advantages – can split income between beneficiaries’ Asset protection Limited liability
Disadvantages:
Possible implication for capital gains tax Cannot distribute tax losses Establishment and administration costs All profits must be distributed, if not, 48.5% tax is payable
Company
A Company is a legal entity completely separate from its shareholders. The Australian Securities and Investments Commission regulate companies. A Company pays income tax on its profits at the rate of 30%. A Company does not have to distribute profits unlike a trust. Where profits are withheld, this is a better option than an individual being taxed at 48.5%. The compound effect of investment capital makes a company structure attractive. A Company costs around $900 to set up and can be done in a matter of hours.
Advantages:
Tax rate 30% Franking credits Can distribute income among shareholders Does not have to distribute profits Separate legal entity
Disadvantages:
No asset protection Can be sued No discretion over distribution of profits CGT index exempt Goodwill CGT exempt
Company in Trust
This involves both structures, utilising advantages from each. Trust profits are distributed to the company, which then distributes the profits to shareholders. It is a way of providing asset protection while also paying a lower tax rate.
Whichever option you choose, you can nominate profits among family members. E.g. if you have two university student children not earning income, you can nominate them to receive a share of the income. This way you pay $0 tax on the first $6,000 for each person, then 17% up to $21,600, then 30% up to $52,500.
