6 pros and cons of business ownership through discretionary trusts

One of the most important decisions to make when starting a business in Australia is deciding what type of structure you want.

The most common business structures are:

  • Sole trader;
  • Company;
  • Partnership; and
  • Trust.

Today, we're going to look at the pros and cons of trust business ownership in Australia, focusing specifically on discretionary trusts.

For more information on what discretionary trusts are and how they are set up, please contact a small business accountant such as WMC Accounting.

Should I choose a discretionary trust business?

Here are the potential advantages and disadvantages of running a business through a discretionary trust:

Pro: They can be tax efficient …

Can business trusts help me pay less tax? This is a question we're regularly asked, and the answer is usually 'yes'. Discretionary trusts have access to capital gains tax concessions and allow for broader tax minimisation strategies.

Con: … but perhaps not for long

In August, Opposition leader Bill Shorten announced that a Labor government would launch a crackdown on discretionary trusts by imposing a 30 per cent tax on distributions. If Labor wins the next federal election, discretionary trusts may become far less attractive as a business ownership structure.

Pro: They can provide significant flexibility …

Trustees of discretionary trusts have complete control over income and capital distribution among beneficiaries. The aim is to distribute the net income of the trust every financial year in order to pay as little tax as possible.

Con: … although some are complex and expensive

Trusts are usually more complex and costly to set up and run than other business structures. You should therefore check with a small business accountant to ensure they are the best option for the type of organisation you intend to have.

WMC Accounting and discretionary trusts. Many people choose discretionary trusts because they offer attractive tax benefits.

Pro: Trusts provide asset protection …

Discretionary trusts prevent a beneficiary's creditors and claimants from accessing key assets. Therefore, if a business goes bankrupt, creditors should not be able to liquidate any property held within the trust.

Con: … but they have extra regulatory burdens

Running a discretionary trust comes with additional compliance obligations, which can cause distractions for business owners who would prefer to focus on growing their organisation. Trust deeds outline the trustee's powers and responsibilities, as well as how held assets should be managed.

Has this helped you decide whether you should choose a discretionary trust to operate your business?

If you would like more information, please contact WMC Accounting today.

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