The Advantages and Disadvantages of Operating a Business through a Discretionary Trust
Operating a business through a discretionary trust gives the trustee/s discretion over how much income or capital is distributed to which beneficiary. For example, if you have two beneficiaries, you do not have to distribute 50% to each. The trustee can pay one beneficiary 90% and the other 10%, and these percentages can change each time there is a distribution.
There is also scope to distribute more to beneficiaries with low taxable income, to help minimize the aggregate amount of tax payable from the distributed income and take advantage of both the lower marginal tax rates, and the $18,200 tax free threshold. Family companies more commonly use discretionary trusts where the parties are comfortable for a trustee to have discretion on what distribution each beneficiary receives.
On the flip side, in a discretionary trust structure, you cannot distribute losses to beneficiaries, only profits. Therefore, a beneficiary’s individual tax liability cannot be minimized by distributing a trust loss to them and reducing their taxable income. A trust must distribute its profit to beneficiaries each financial year, otherwise any undistributed income will incur the highest marginal tax rate (currently 45%, plus 2% Medicare Levy).
Whereas a business operating through a company structure will incur company tax rates (currently 27.5% for gross revenue under $10 million per annum), for undistributed profits. For more specific advice, please contact us to review your personal circumstances.