The most tax effective Business Structures

Business Structures: Family Trusts

Trusts for Business

Be careful in which “vehicle” you buy or build a business or asset. You can run your business as a sole trader, partnership or through a company via a Family Trust or Unit Trust or a combination of the above.

You may buy a business in your own name. As things go well you may want to share the profits with your spouse to reduce tax. Later you may want to take on partners or gain the benefit of a family, unit and service trust.

Every time there is a change in the ownership the tax man wants his cut.

If you started your business from scratch then your “cost base” could well be nil. If you later sell or transfer the business, to say, a Family Trust then you may pay capital gains tax on 100% of the value of the business.

Family Trusts

Family Trusts provide your advisor with scope in sharing the tax burden between your family members.

This is what a Family Trust looks like:

Trustee = puppet; Appointor = god

For asset protection it may be better to have a company as the Trustee.

The power to appoint and dismiss the trustee is given to the Appointor of the trust. You can also appoint both yourself and your spouse as Appointors.

Appointor – this person can sack the Trustee Trustee – this is the figure head, you, your spouse or a company Settlor – This person “settles” the first $10 on the trust and does no more
Trust Fund – the original $10 and other assets you put into the trust
Beneficiaries – Mum, Dad, children, grandchildren, any company you have an interest in, mother in law and Uncle Harry. The Beneficiaries have no rights to demand anything.

Avoid CGT? Yes, you can generally change the Appointor (controller) without triggering CGT. For example, mum and dad can make the children the Appointors when they die.

Business Structures: Unit Trusts v Companies

A Unit Trust is similar to a Family Trust but is used for two or more families.

One or two people, usually a husband and wife, control a Family Trust. The husband and wife have complete discretion to whom they distribute income each financial year. Such “trust” is not usually shared outside a family! Hence the need for a Unit Trust.

How does a Unit Trust work?

At the end of each year, income is distributed to the Unit Holders in proportion to the units that beneficiary holds. (Unlike in a Family Trust) the Trustee has no discretion.

Units are often held by Family Trusts, companies or by individuals.

Unless the Unit Trust is correctly drafted unit holders are liable for any shortfall.

Can’t I just use my Family Trust?

A Unit Trust serves a different purpose to a Family Trust. A Unit Trust has:

  • negotiability (buy and sell units)
  • fixed annual entitlements to income and capital (no discretion)

Transferring units

The ownership of the trust funds is divided into a number of equal units. The units are recorded on a register and are transferable like shares in company.

Well-constructed Unit Trusts include mechanisms for cashing in (redemption) and transferring the units.

Unit Trust versus a company

On the face of it, owning units in a Unit Trust is similar to owning shares in a company. The High Court of Australia has, however, stated that a unit in a Unit Trust is fundamentally different to a share in a company. A shareholder has no interest in the assets of the company. A Unit Holder has a proprietary interest in the trust property: Charles v Federal Commissioner of Taxation (1954) 90 CLR 598. This is a beneficial interest.

Unlike a shareholder, a unit holder can lodge a caveat over Unit Trust land.

Other differences include:

  • A trust comes into existence as the result of a private rather than a government There is less governmental interference of trusts.
  • A company is a legal entity in A trust is not a separate legal person.
  • Shareholders are linked by a contract in the company’s Unit holders are not necessarily in a contractual relationship with each other.

Business Structures: Self-Managed Super Funds

What is Superannuation?

Superannuation is a method of saving and investing money during your working life for your retirement.

A superannuation fund is set up by a trust deed. The deed contains the rules of the fund. It is administered by a trustee. The trustee holds and invests the trust property on behalf of the members.

What are the benefits of a SMSF?

You can set up your own super fund. This is called a Self-Managed Super Fund (SMSF). It gives your advisers greater control.

  1. Potentially decreased  costs  because  of less But not always.
  2. New cash       flow      and      tax      planning But more complexity.
  3. Designing your own investment strategy, with your
  4. The choice      of     a     broader    band      of investment options.
  5. Invest in  your  business  premises  (eg offices) and lease
  6. Set up flexible

Who traditionally uses SMSFs?

  1. Rich people,  self-employed  and  small business owners.
  2. Retirees who wish to manage their own pension
  3. People who believe they can achieve better returns than professional
  4. People that relish

What are the disadvantages?

  • Compliance & Auditing: Your SMSF needs annual financial statements and auditing by your
  • Investment Strategy: Your SMSF needs a regularly updated complying “Investment Strategy”. Your adviser assists
  • Lending money: You can’t lend money to yourself or any
  • All members are trustees: Each member must also be the trustee. There are issues when a member gets sick or becomes of unsound
  • Borrowing money: The fund can however borrow money from a
  • Can’t sell your assets into the fund: apart from listed shares and commercial real estate, the fund can’t purchase any assets you This is irrespective whether the price is fair.
  • Trust Funds go out of date: Fund deeds need regular reviews and updating.

What assets can my SMSF own?

Most SMSFs hold shares, cash and property. While a SMSF can own almost anything, the trustees only maintain the fund for the benefit of members for retirement. What the fund invests in is tempered by that rule. This is very much a financial planning & accountant question.

Adj Professor, Brett Davies,  CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
National Australian law firm

Mobile:       04777-96959
Reception: 08 6389-0100
Email:         [email protected]
Skype:        brettkennethdavies

2 Comments

  1. Neil says:

    My siblings (2 brothers and a sister) have recently inherited 2 properties worth about $3 million. Should we place ownership of the properties in a unit trust pending retirement and settling in about 5 years time? What are your thoughts?

    • Brett Davies says:

      Neil, you need to consider:
      1. stamp duty (about 4.5%) is payable when you transfer real-estate NOT under the terms of the Will. The deceased should have put a 3-Generation Testamentary Trusts in the Will to begin with.
      2. Capital Gains Tax is also payable.
      3. I am not sure what you would achieve from moving it out of your names into a Unit Trust, if you are going to suffer the stamp duty and CGT then perhaps a partnership of Family Trusts would be more flexible.
      4. If you are looking at Centrelink deprivation rules then you need to ‘give it away’ to someone else and then wait 5 years. A Family Trust, if structured correctly, could achieve that.

      Adjunct Professor Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
      Legal Consolidated Barristers and Solicitors
      39 Stirling Highway, Nedlands, WA (Post Office Box 5169, Dalkeith, WA 6009)
      Mobile: 04777-96959
      Direct: 08 6389-0400
      Reception: 08 6389-0100
      Email: [email protected]
      Skype: brettkennethdavies
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