An Introduction to Australian Trust Companies Building 'trust' into your company structure
An Introduction to Australian Trust Companies Building 'trust' into your company structure
Trust companies are a very specific type of business, and one that is quite common among small and medium enterprises for various taxation and administration-related reasons. They are especially common for family-based businesses, and in certain circumstances can save you a substantial amount of money. Trust companies do have their drawbacks, though - today we explore their ins and outs in Australia.
What is a trust company?
There are two main types of trust company in Australia - unit trusts and discretionary trusts. The difference between the two types of trust company is mainly in the way they distribute the income they generate - we'll explore that in a little while. Trusts are one type of company in Australia - they sit alongside others such as:
Sole traders
Partnerships
Proprietary companies
Companies limited by shares
Companies limited by guarantee
Companies limited by share and guarantee
Trusts
There are also a couple of oddities in the array of company structures that it is possible to have in Australia, and these are usually formed for very specific purposes.
Discretionary trust companies
In a discretionary trust company, the trustee has the power to decide how the income from the trust will be distributed among the beneficiaries. Discretionary trust companies have to decide on a distribution structure afresh every financial year, for tax planning purposes. Within the limitations of the Corporations Act, discretionary trusts may also be limited liability companies, which is achieved by using a corporate trustee. Family trusts are a type of discretionary trust company.
The benefits of setting up a discretionary trust, including a family trust, include:
Subject to less regulation than an ordinary registered company
Provides tax advantages, because all beneficiaries of the trust can use their tax-free thresholds in determining what tax has to be paid. For example, children that are among the beneficiaries of the trust would also be able to use their tax-free thresholds, though they probably wouldn't be earning their own income.
Plenty of flexibility for the trustee to determine their own distribution of assets
Easier to disband than a normal company is
Asset protection, in some circumstances
Provides a way of easily transferring assets to future generations (in the case of family trusts)
Unit trust companies
In a unit trust company, the beneficiaries each own a set number of units in the trust. The profits are distributed according to the number of units that each person has - when one person purchased 50% of the units, they are entitled to 50% of the proceeds of the trust company. However, units may have different rights and entitlements in some unit trusts - share of income, voting rights and preferential rights to interest may be affected.
Benefits of a unit trust company
These are usually fairly simple companies to administer - there is far more structure and much clearer guidance on income distribution. Other advantageso fo unit trust companies include:
Transferability of units
Ability for the trustee to reacquire units
Less regulation than an ordinary registered company
In many cases there are tax advantages
There is little scope for legal problems in redeeming units from their holder
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