Quick Guide to Trusts

Key Positions:

• Trustee: Manages and is responsible for trust finances, including liabilities.
• Beneficiaries: Individuals or entities eligible to receive money from the trust.
• Appointor: Authorised to select a replacement trustee if needed.

 

Entity Characteristics:

• The trust operates as its own entity with a Tax File Number (TFN), Australian Business Number (ABN), bank account and assets.
• Governed by a trust deed, outlining rules and establishing its entity status.

Taxation:

• The trust files its own tax return, detailing income, expenses, and beneficiary distributions.
• Beneficiaries include trust distributions in their tax returns and manage associated taxes, often through quarterly PAYG instalments, themselves.
• Profits must be distributed annually, regardless if money paid to beneficiaries, this can cause potential impacts on beneficiary cash flow being taxed on money not received.
• Undistributed profits are taxed at 47%.
• Trust minutes documenting distributions must be signed by June 30 each year, requiring tax planning.
• Strict rules prevent distribution to beneficiaries who will never receive the money just to take advantage of lower tax rates.
• Personal Services Income (PSI) rules still apply.

Drawing Money:

• Beneficiaries working for the business can receive wages. The Trust will be responsible for standard PAYG withholdings, superannuation and Workcover requirements. STP reporting requirements apply.
• Alternatively, regular drawings can offset year-end entitlements, with beneficiaries responsible for their own taxes and superannuation.
• Fringe Benefits Tax (FBT) applies to trust-owned vehicles used by beneficiaries or employees.

 

Best Practices:

• Prepare financial statements alongside tax returns annually to track beneficiary entitlements.

 

Responsibility:

• Trustees bear responsibility for the trust’s actions and can be liable for debts.
• Trustee can be an individual or a company, with the latter offering limited liability protection.
• If a company acts as trustee, additional setup and annual fees apply.

 

Bucket Company:

• Created to receive distributions once primary beneficiaries reach optimal tax thresholds (usually $120k or $180k).
• Taxes at a lower rate of 30% compared to an individuals’ highest tax bracket of 47%
• Requires physical receipt of funds, lodges its own tax return, and incurs associated costs.
• Can later pay franked dividends to shareholders as needed.

 

Summary:

Pros:

• Flexible distribution control for tax management.
• Independent entity capable of asset ownership, loan procurement, and business operations.

Cons:

• Increased compliance responsibilities for trustees.
• Additional accounting fees compared to sole proprietorships.
• Some industry licenses need to be held by the Trustee.