Family discretionary trusts maximise flexibility

Date: December 15, 2015

(29)
Comments 9

Max Newnham

Setting up a family discretionary trust may be the best tax vehicle for this child care operator. Photo: Peter Braig

When a husband and wife go into business choosing the wrong business structure to own and operate the business through can cause major problems. In addition to paying too much income tax, if the wrong structure is used, the family's assets can be put at risk in the event of a business failing.

Q. I and my husband are looking to start up a business of a family day care centre. I will be involved in day to day running of the business and he will deal with administration tasks. He also works full-time for an insurance Company.

Can we form a family partnership with different shares of partnership income as he will be earning sizeable employment income? If not can we register a different kind of partnership that will allow us to have different profit distributions?

A. I am not sure whether you are getting mixed up between using a family discretionary trust with a partnership to own and operate the family day care business. With your husband being in full time employment you need to choose a business structure that means his share of the business profits result in tax being paid at too high a marginal tax rate.

The marginal tax rate paid by most Australians, including the 2 per cent Medicare Levy, is 34.5 per cent. This rate applies to income earned of between $37,000 up to $80,000. Income of between $80,000 up to $180,000 has a Medicare inclusive tax rate of 39 per cent.

Partnerships are often started without a partnership agreement being drawn up. In this situation the relevant legislation, which is on a state-by-state basis, decides what can happen within the partnership. If you decided to have a partnership you should have an agreement drawn up that allows for the partnership income to be distributed differently from the ownership of the business.

By this I mean you and your husband could be 50 per cent owners of the day care centre, but the profit from the business would be distributed in accordance with a resolution signed by you both as partners.

The ability to distribute more profit from a partnership to a partner with a lower taxable income can also be achieved by recognising that one partner has worked more hours than another. One major problem with choosing a partnership to operate the day care centre would be your personal assets are at risk if you have a major legal claim against your business.

A better option would be for you to set up a family discretionary trust with a company acting as trustee. Family discretionary trusts allow the owners of the business to distribute the net business income amongst their family group to ensure that tax is paid at the lowest possible marginal tax rate.

In addition to the flexibility when it comes to distributing the net business income, by having a company act as trustee for the discretionary trust your family's private assets are protected in the event of the business being sued or failing.

Questions on small business income tax and other issues can be emailed to max@taxbiz.com.au. Max Newnham is a partner in the accounting firm TaxBiz Australia and founder of www.smsfsurvivalcentre.com.au

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9 comments so far

Pity the poor PAYE taxpayer suckers who can't use family discretionary trusts to minimize taxes or the small business and tradies who can write off $20,000 of equipment. The rest of Australia should be thanking these poor PAYE taxpayer suckers for keeping Australia from the fate of Greece.....

Commenter

Shane From Melbourne

Date and time

December 15, 2015, 1:48AM
It is important to hold the asset (Ownership of the business) in a separate structure to the operation of the business. Typically two trust with a company as trustee. This allows for rent to be paid between entities etc.
This is done to protect the asset owning entity in the event of negligence or some other liability. A new company can be started to run the business if needs be. Distributions can be made and wages paid as you see fit. You need to pay for expert advice on this matter.

Commenter

Rangieman

Location

Canberra

Date and time

December 15, 2015, 2:15AM
Thank you!!
I just wanted to say thank you to the author of this article for being about the only journalist who reports income tax rates honestly.
"Income of between $80,000 up to $180,000 has a Medicare inclusive tax rate of 39 per cent."
Given that the medicare levy is an unavoidable income tax, it is just repeating government propaganda to split it out and claim the income tax rate is 37% (plus 2% medicare).
We need to stop doing that.

Commenter

xQx

Location

Sunshine Coast

Date and time

December 15, 2015, 9:11AM
Shane, whilst appreciating your concern about the disadvantages for PAYE tax payers, it's important to understand that those PAYE wages are funded by a business, and unless there were some incentive to do so, no one would risk starting an enterprise. It's a team effort.

Commenter

sydney

Date and time

December 15, 2015, 9:25AM
- Sydney - I disagree. The poor old PAYE citizen DOES in fact have the raw end of the deal when it comes to paying tax. There are plenty of people around who would start a business with or without employees. The incentive is not to pay less tax....it is to make a LOT of money from your business. There are also people who simply CANNOT work for other people - they don't like being told what to do and don't last as PAYE employees.
  
  Commenter
  
  mytwobobsworth
  
  Date and time
  
  December 15, 2015, 11:06AM
Another advantage of a corporate trustee is the capacity to be treated as a PAYE taxpayer with the benefit of superannuation and workers compensation insurance which the normal partnership arrangement does not usually include. Shane of Melbourne seems to have swallowed the usual propaganda about trusts. Trusts enable a more equal allocation of income within a family and, as anyone in business knows, tax is a cost and, without the proper structure, you go out the door backwards while your competitor keeps on prospering..

Commenter

Veritatis Splendor

Location

Burnie

Date and time

December 15, 2015, 10:04AM
- Hardly propaganda when the tax adviser blatantly admits that part of its purpose is to minimize the tax paid:
  " Family discretionary trusts allow the owners of the business to distribute the net business income amongst their family group to ensure that tax is paid at the lowest possible marginal tax rate."
  
  Commenter
  
  Shane From Melbourne
  
  Date and time
  
  December 15, 2015, 12:29PM
Or you could just use a good old fashioned company and have equal shares. You pay yourself the profit as your wage until your wage gets to be more than his job wage. Then you pay out any extra profit as dividends..Only one extra tax return, one accountants fee, one extra asic fee per year rather than many with the double trust structure mentioned. I do like the idea of some asset protection considering you are dealing with kiddies though. Get some advice but be mindful accountants love to load people up with extra entities (more tax returns to do)..

Commenter

Mac

Location

sydney

Date and time

December 15, 2015, 10:15AM
- "...you could just use a good old fashioned company and have equal shares."
  Which means that you own assets that can be seized i.e. there is no asset protection afforded.
  Dumbed down: a trust structure provides protection as the trust "has" the assets and the trustee simply looks after them. This provides asset protection.
  So there are good reasons for the multiple structures (and tax returns) if asset protection is what one is after.
  
  Commenter
  
  Not an accountant
  
  Location
  
  Sydney
  
  Date and time
  
  December 15, 2015, 2:41PM

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