If you’re considering various different structures for your practice, one of the key structures to consider is whether or not you want to structure your practice as a trading trust.
Trading Trusts as a Business Structure: Key Features and Considerations
Trading Trusts are a widely used business framework designed to benefit a specified group of individuals or entities (known as beneficiaries). The trustee—who may be an individual (acting in a personal capacity) or a corporate entity—is responsible for managing, operating, and administering the trust’s assets.
Advantages of Operating a Business Through a Trust
1. Tax Efficiency
One of the principal benefits in choosing a trust structure is its potential tax benefits. Unlike companies, trusts “the assets that made ordinarily on a disposal capital gains tax (CGT) are eligible for the general CGT discount. This may create some benefit if you’re planning for the trading trust to own significant assets. Notwithstanding, from a structuring perspective asset holding is often better to be in a separate entity to the trading entity to minimise liability exposure.
Additionally, the trust itself is not taxed on income that is distributed to beneficiaries; instead, the tax liability passes through to the beneficiaries. This allows for strategic profit distribution among beneficiaries, potentially resulting in more favorable tax outcomes. Again, countervailing consideration is that proprietary companies that distribute to shareholders will also provide franking credits on the paid tax..
2. Limited Liability Protection
Trusts can provide a degree of liability protection, as beneficiaries are generally not personally responsible for the trust’s debts—these obligations fall to the trustee. Where the trustee is a corporate entity, this adds an extra layer of insulation against potential liabilities. This still does not minimise against the liability that the directors of a corporate trustee would have for trading insolvent.
Key Considerations Before Choosing a Trading Trust Structure
Despite their benefits, trusts involve greater complexity and higher setup costs compared to other business structures. (For example, stamp duty may apply upon establishment – such as the $500 fee in New South Wales). Additionally, securing financing can be more cumbersome, as some lenders may require all beneficiaries to act as guarantors—an impractical requirement for trusts with numerous beneficiaries.
Trusts also present operational challenges. Trustees are legally obligated to distribute income to beneficiaries, which can make it difficult to retain earnings within the business for future growth or reinvestment.
Given these factors, the choice of business structure should always be made in consultation with both legal and tax advisors to ensure it aligns with your specific needs and objectives. Trading Trusts are a strong option for practices to consider in their structuring.
Disclaimer: This article provides general information only and is not intended to constitute legal advice. You should seek legal advice regarding the application of the law to you or your organisation.
