Is a Trust Right for My Business?

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Trust distributions have been under scrutiny by the ATO in recent times. Such keen focus from the Australian Taxation Office has many business owners wondering if the trust structure is still the right answer. 

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What changes have the ATO made to trusts?

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In February 2022, the ATO updated its guidance regarding trust distributions. The main focus is on distributions made to adult children, corporate beneficiaries and entities carrying losses. Essentially, they’re cracking down on distributions that could potentially be used by people for aggressive tax avoidance purposes. 

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While these types of distributions have been used by people for years, the ATO is paying particular attention to arrangements under section 100A of the Tax Act, which is an anti-avoidance rule designed to deter trust distributions to a lower tax bracket individual where the benefit is transferred to another individual, usually with a higher tax bracket. Specifically, the ATO has changed the way they view parents who may be benefiting from trust distributions to their adult children, where the children simply transfer the funds to the parent.

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Are trusts still useful? 

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While trust distributions have fallen under tighter scrutiny, they still offer benefits when used as a business structure. 

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Protecting assets with the corporate veil

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If a corporate trustee is utilised (rather than an individual trustee), the corporate veil is available to shield any of the beneficiaries’ personal assets from creditors. This is relevant in the event that an individual is unable to pay a creditor. The creditor is not able to access the trust assets thanks to the corporate veil. 

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Carry-forward losses

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If a tax loss arises while operating a business or holding an investment in a trust, the loss is not distributed to the beneficiaries, meaning they are not liable to contribute money to meet any losses. The losses are carried forward within the trust indefinitely until they can offset the loss from the trust's net income in the future.

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CGT discount

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If a family trust makes a profit from selling assets that have been held for more than 12 months, a 50% capital gains tax discount can be utilised. The 50% CGT discount is not available when using the company structure. 

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Disadvantages of the trust structure for businesses

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One of the biggest disadvantages that comes with the trust structure is that any retained profits will be taxed at the highest tax rate. For businesses looking to reinvest profit into the business at a future date, a trust may not be the most tax-effective option. 

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Avoiding the ATO’s anti-avoidance crackdown

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For tax planning purposes, it’s important to understand that any undistributed amount remaining in a family trust at the end of the financial year is taxed at the highest income tax rate. While distributing funds to the family member with the lowest tax bracket used to be acceptable, if the funds are going to be used by family members with a higher tax bracket, it’s important to ensure all funds are appropriately distributed to the individual who will be using the money.  

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Distribution of funds to the taxpayer who will be using the money might see the overall tax liability increase, however, it’s a surefire way to ensure you avoid breaching section 100A of the Tax Act. 

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To discover the right structure for your business, please get in touch with us today. 

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