Discretionary trusts are a popular vehicle for holding certain assets and/or a business for small business operators.
Discretionary Trusts are the preferred vehicle because of their flexibility and adaptability to the needs of their users, however they are complex creatures and can be expensive to run.
The main advantages of utilising trusts are as follows:
They provide flexibility in distributing income and capital gains to beneficiaries, taking into account the tax position of the recipients.
There is also more family and commercial flexibility than with other types of structures.
Trusts offer beneficiaries greater asset protection from creditors than companies can provide to shareholders.
Trusts provide access to the 50 percent CGT discount, while companies do not. This 50 percent exemption provides substantial tax savings upon the disposal of business assets.
Trusts can distribute income to a corporate beneficiary thereby capping tax rates at 30 percent.
Trusts allow for streaming of income (i.e. identifying different classes of income of the trust and then allocating these to different beneficiaries in the most tax effective manner). For example, one beneficiary might receive franked dividends only whilst another receives foreign income only.
Trusts allow for distinguishing between income and capital beneficiaries – if a beneficiary is only entitled to capital gain distributions from a trust and he/she has carry forward capital losses, the carry forward capital losses may offset the capital gain distributed from the trust.
Confidentiality of trading results can be preserved in a trust (including a hybrid discretionary trust) is not subject to the regulation that the Corporations Law imposes on companies. The trust’s tax returns and other financial or trading information are not publicly accessed. Companies, by contrast, may need to disclose confidential information every year, which is searchable in the public domain.
Even large trusts are not required to be audited or to lodge accounts with ASIC. Large companies on the other hand – even private companies – are subject to such publicly searchable disclosures and the cost of meeting audit and accounting standards.
Succession planning. Usually, discretionary trusts have wide classes of beneficiaries who may range from grandparents down to grandchildren.
Trusts are generally cheaper to run.
Disclaimer: This is not advice. Items herein are general comments only and do not constitute or convey advice per se. The information contained in this article is for guidance only and should not be relied upon without obtaining professional advice having regard to your specific circumstances.
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