When it comes to owning and operating a business one of the most tax effective and flexible business structures is a discretionary family trust. It is not uncommon for a business to be started as a sole operator or a partnership of individuals, and then transfer the business to a family trust.
Because of a section of the tax act, being part IVA that effectively bans transactions where the sole or dominant purpose is obtaining a tax benefit, care should be taken initially when deciding how to own and operate a business.
There are many reasons that are not based on obtaining a tax advantage for a sole trader or a partnership of individuals transferring their business to a family trust. One of the key non-tax reasons is, when a company is used as a trustee of a trust, to protect the owners' personal assets.
When a business is commenced through a company structure, and is transferred to a family trust, there needs to be a good non-tax reason for doing so and some administration steps must be taken.
Q. I have been running a medical centre through a company and have recently created a discretionary family trust. Currently I have two cars registered under my company that now acts as trustee of the trust. I have three questions:
1. Do I have to transfer the ownership of the cars to the trust?
2. When I pay for all of the business expenses do I have to use the company or trust as the payer?
3. I have a bank account each for the company and the trust both, which bank account has to be used for my business in future?
A. For the sake of answering your questions I will assume that you had a good non-tax reason for transferring the business from the company to the family trust. With regard to the ownership of the cars you have two options.
The first would be to transfer ownership from the company to the trust. This would however involve you in transfer fees and other costs related to the sale. The second, and possibly preferable option, is to lease or rent the cars owned by the company to the trust.
When a business is operated through a trust everything must be done in the name of the trustee rather than the trust. To avoid confusion, especially in your situation, you must make sure there is a new ABN for the trust and legal documents such as invoices etc should show the name of the company acting as trustee for the family trust.
All income and expenses for your trust should be processed through its new bank account. The company bank account could be used for matters related solely to it, such as receiving the rent if it retains ownership of the cars, but it should not receive any income or pay expenses for the family trust after transferring ownership of the business.
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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