While a trust might sound like a technical term, trust us, it’s not. A trust is simply a legal relationship in which an individual (or a company), called a trustee, runs the business for the benefit of other people (beneficiaries).
The main benefit of a trust is income splitting. This allows you to distribute the income to a series of people and have it taxed at their marginal tax rate. It also limits the liability of the business by separating it from the assets of the beneficiaries.
For example, a woman might run a marketing business in a trust structure. She would then spread the profit of the trust each year to the beneficiaries (her partner and her children). If the trust became liable for debts, the personal assets of the woman, partner and children would be protected.
The disadvantages of a trust include the cost in establishing it and the costs in maintaining it. A trust cannot retain profits for expansion without being liable to pay penalty tax rates. You cannot offset losses of the business against other income the beneficiaries might have.
If you have further questions, please contact frank@franklaw.com.au
This is not legal advice.