Another way to describe a trust is as an obligation or a promise – where a person or a company agrees to hold income-earning assets or property for the benefit of others. A trust formalises this obligation. The one who legally holds the assets is the trustee. Those who benefit from the income are the beneficiaries.
One basic function of a trust is to separate legal ownership and control (which the trustee has) from beneficial ownership (which the beneficiaries have). A natural result from this is increased asset protection, as the beneficiaries’ personal finances are not put at risk by the business, since the business assets are legally owned by the trustee and not by the beneficiaries.
The most common type of trust is a discretionary or family trust. Setting up a trust can be more expensive, and administrative paperwork potentially more complicated, but there can be tax advantages, as:
• tax is usually paid by the beneficiaries at their personal tax rates, which may be well below the top marginal rate, or to a company at its corporate tax rate of 30%, not by the trust,
• as trustee, you can use your discretion each year to decide which beneficiaries receive income, and how much – as long as the outcomes are within the rules contained in the trust deed, which is the document governing how the trust operates
• the trust’s beneficiaries, via their individual or company returns, pay tax on their share of the trust’s net ‘distributed’ income
• if all income is distributed, the trust itself would generally not be liable for any tax except in limited circumstances, when the trustee would pay tax on behalf of certain beneficiaries
• a trust will need its own tax file number, and the above ABN and GST obligations apply
• a trust is not liable for PAYG instalments, but trustees and beneficiaries may be
If a beneficiary is not over 18 years of age or is not an Australian tax resident, the trustee will pay tax on the distribution on behalf of the beneficiary. The beneficiary must declare the income anyway, but can claim a credit for tax paid on their behalf.
If the trust holds on to income, you as trustee will be assessed on that income at the highest individual marginal rate. If the trust carries on a business, all income earned and claims for expense deductions must be shown in a trust tax return, which will also show the amount of income distributed to beneficiaries.
The GST system is a complex and confusing one. For this reason AWARD ensures its staff are continuously up to date on the changes, and able to offer you accurate advice.
Every transaction now brings with it a GST issue. We have experience with these issues and are able to offer expert advice on the implications of GST for your business.
The GST related services we offer include, but are not limited to:
- Advice on registering for GST
- Filing and adjusting GST returns
- ATO audit assistance
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