Company VS Discretionary Trust

Hi all,

I´m trying to figure out which business structure should I go for a new business I have in mind.

As a background, I´m based in Brisbane, We don´t have any assets apart from the apartment we bought last year my partner and myself, but at this point is more a mortgage than an asset I would say... + we have one child.

I don´t know any lawyers or accountants and I would like to have a clear vision before I go to speak to them, since the little savings I´ve got are for the overhead costs. Maybe someone could point out things I should be considering in this new adventure.

From what I have read, I feel that there is a tendency to encourage Discretionary Trust over Companys because its flexibility, distributions, assets protections and probably more things I don´t even know yet.
It seems that the actual set up of the Trust + Company is about double of just a company but it would cost yearly the same or even less.

Obviously this a very simplified statement but I feel that paying double to set up a trust could be a saving money act in the future. Why would you decide to set up a company over a trust?

The more I think about it, the more confuse I get. I would appreciate some comments ;P

Cheers.

 

I have written many tax and legal tips on trusts on this forum so have a read.

Keep in mind if you do go down the trust route you should have a company as trustee to limit liability.

if you go down the company route then you should probably have a discretionary trust own the shares for tax and asset protection reasons.

Also if a company is used it is easier to transfer part of the business by transferring a percentage of shares. If a trust owns the business you would need to transfer port of the business - which would be very cumbersome and complex.

 

If you are not looking at bringing on other partners or investors than the flexibility of discretionary trust is outstanding.

 

Changes to company shareholding (ie % ownership) can be dutiable where a DT has flexibility for sharing income BUT I assume that is limited to hubby and wife so of limited value. Neg gearing in a trust or company both quarantine the loss. +ve geared property in a trust can be shared flexibly but in a company it could leave extra tax to be paid.

Extra costs for ASIC fees, accounting and tax are inevitable v's owning in own name/s

 

Another thing to consider is that trusts must vest within 80 years (even SA trusts probably) but a company can live forever.

 

a trust might be better than a company now as companies are not eligible for the small business tax offset. a share of profits from a trust makes one eligible.

new non-refundable tax offset available to individuals deriving Small Business Entity ("SBE") Income from anunincorporated SBE from 2015/16 onwards calculated as the lower of:

• 5% of the individual’s ‘basic income tax liability’ (i.e. marginal tax rate) relating to their:
  - SBE taxable income derived as an SBE sole trader; and/or
  - share of SBE taxable income derived as a partner or beneficiary in a SBE partnership or SBE trust, or
• $1,000.

thanks to taxastute for the above.

 

You do realise that the entire reason that offset exists is to compensate those who operate their small business outside a company and therefore otherwise wouldn't get a benefit from the lower tax rate of 28.5% for SBE companies right (which is scheduled to go even lower under budget proposals)? Given how severely capped that offset is in comparison to a 1.5% reduction on tax it's also not going to be beneficial in most successful businesses.

 

understand wogitalia.

if the individual had a tax rate lower than 28.5% then it still may benefit them. would need to do further analysis of the client situation to determine that position.

remember multiple beneficiaries of the sbe trust will be eligible and this could add up with a husband and wife and children at uni over 18

 

Yep this is fair

Certainly something you would want to seek specific advice for.

 

Hi there -

Good question and generally see your accountant to weigh up the benefits of each before you set up a company or trust.

I prefer a company and shares are owned by a discretionary trust. Try to get the trust set up earlier in the journey than later.

The trust is extremely effective to do the tricks around this time of year to limit your taxable income, you need a good accountant to assist you in this regard and some trusted family members to dish out the distributions also.

Cheers Ivan