Because Australia does not have limited liability tax-transparent business vehicles such as US limited partnerships, LLPs or LLCs or Subchapter S Corporations, many Australians use trading or investment trusts.
Trusts have advantages over partnerships. They can provide greater flexibility and can provide more limitation of liability.
But if you run a trust, you should know that you can be held to account for “breach of trust”.
The main advantages and disadvantages of a trust are as follows:
- you can enjoy limited liability provided directors of trustee company do not commit insolvent trading
- but the trustee must record minutes of various decisions and sometimes allow access to records by beneficiaries
- you can put funds can be freely put into the business with no regulatory restrictions or tax consequences
- but the contributed funds become subject to legal obligations to beneficiaries
- subject to the trust deed, funds may be withdrawn from the business and paid to beneficiaries
- no beneficiary over 18 can be forced to leave credited shares of income in the business
- beneficiaries may use the Court to remove a trustee accused of improperly removing funds from trust or denying beneficiaries’ rights
- undistributed trust income taxed at top personal marginal tax rate
- distributed income is taxed at individual or corporate rate of beneficiary
- losses cannot be distributed and used in same year but must be carried forward and may be cancelled
- franking credits on dividends cannot pass through a discretionary trust unless a family trust
- but a family discretionary trust has restricted beneficiaries
- there is flowthrough of surplus cashflow representing deductions and CGT discount
- trusts “vest”, that is, come to an end, triggering potential capital gains tax and stamp duty liabilities