Is your Trusted Adviser attempting to convince you to restructure your business to a trust? Or perhaps they have already sold you on the benefits and your well on your way and now a trading trust.
It’s frustrating to discover an increasing number of business operators who have been convinced by their Trusted Adviser to restructure their business to a Trust when their circumstances don’t give rise to any benefits under that structure. Even worse, in many cases the structure is detrimental to the business’s and shareholders/beneficiary’s goals.
So why do people move to a Trust?
Your Trusted Adviser may have suggested a Trust structure would protect your assets and reduce your tax expenses. That this sophisticated solution that only they can deliver will be the answer to all your problems or that all the diligent, well informed business managers are doing it, so you should too. Unfortunately, in most cases these benefits are rarely ever realised and the negative consequences can be dire.
The truth about Trusts:
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Under a Trust you must distribute 100% of the trust income generated from your business every year to the beneficiaries.
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It’s near impossible to retain earnings in the Trust to save for future asset purchases which means you are now reliant on expensive debt finance or providing personal loans to the Trust.
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You and the other beneficiaries are taxed on all the trust income which can be at a greater tax rate than company tax rates.
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Unless your Trust is for a deceased estate your distributions to your non-adult children will likely be taxed at the highest tax rate.
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There are no imputing/franking credits passed on with distributions to reduce your personal tax liability, like the case with a Company structure.
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Depending on cash-flow timing or if your business goes through hard times you may find you need to distribute more Trust income to beneficiaries than the trust has in available cash resulting in you personally being taxed on income you haven’t even received.
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Trust accounting and tax rules are more complex, and this generally results in higher ongoing compliance costs charged by your Trusted Adviser.
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Changing the structure is costly, there are establishment costs and a new accounting system file/account will need to be setup by your Trusted Adviser.
Before making the decision to change your business structure to a Trust make sure you explore these possible disadvantages. Generally, unless you are in the business of owning and managing cash-flow positive property or are setting up a Trust for a deceased estate we would recommend a Company structure because it provides greater flexibility in respect to distributions, tax/franking credits often result in little to no personal income tax on distributions, your able to retain earnings in the Company often reducing debt financing costs and it’s easier to administer and therefore lower compliance costs. There are even some other advantages in keeping some property in separate Companies as opposed to Trusts to achieve asset protection.
This information is general in nature and shouldn’t be relied upon for your specific circumstances.
If you want more information on Trusts that relate to your circumstances, please contact your Trusted Adviser/Tax Accountant or OnVenture on 1300 300 013.