Frequently Asked Questions
You need to check the relevant legislation in your State and Territory, as the rules are different in each jurisdiction.
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When are unit trusts recommended over discretionary trusts?
- Unit trusts will usually be recommended when more than one family is involved in the trust. The interest in the trust will be divided into 'units' which are then distributed to various unit holders among the multiple families.
- Some of these unit holders might be discretionary trusts in themselves providing the relevant families with the benefit of both structures.
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What kind of trust is better for asset protection?
- Discretionary trusts can be attractive as asset-holding structures because any trust assets are protected in litigation (court action) against beneficiaries. The interest of each beneficiary is described as 'discretionary' rather than fixed or certain.
- Because no set beneficiary technically owns any trust assets the trust assets generally won't be available to creditors upon any insolvency or bankruptcy claims.
- However if there is litigation against the trustee the personal assets of the trustee may be challenged.
- Appointing a corporate trustee can further reduce the threat of any attack on assets by limiting the available pool of assets owned by the trustee company.
- You can use our LegalPlan™ membership to ask lawyers for tenders or a Fixed Fee Quote in relation to your asset protection needs.
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Are capital gains distributions made to beneficiaries eligible for the 50% Capital Gains Tax (CGT)?
- Under a discretionary trust capital gains distributed to beneficiaries will usually be eligible for this concession. This is one of the main benefits of a trust over a company structure.
- Any beneficiary who receives a capital gain distribution can claim the 50% capital gains discount as long as the relevant asset has been held for more than 12 months.
- If a company attempted to sell the family business (the asset) it would not be entitled to the 50% CGT discount.
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Are all the tax concessions for small businesses still available for trusts?
- Yes. As long as you meet the criteria of having an annual turnover of less than $2 million as well as meeting some additional criteria the small business concessions are still available to you whether you operate as a trust, partnership, company or sole trader.
- More information about small business concessions can be found on the ATO website at www.ato.gov.au.
- You can also use our free and anonymous Ask a Lawyer service if you have a particular issue you want to know more about.
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How do I register my new business as a trust for taxation purposes?
- The normal registration process exists for businesses that operate as a trust. You will need to register for an Australian Business Number (ABN) and a Tax File Number (TFN). During the registration process you will be asked to declare what structure you are using to carry on your enterprise. You simply nominate that you will be operating as a trust.
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The normal registration process exists for businesses that operate as a trust.
- Many recent reforms of legislation have dealt with discretionary trusts and have focussed on the level of taxation benefits that can be obtained through such structures. As with any business type there is a risk of further legislative reform. This is one of the risks of any choice of business structure.
- The law is always changing and adapting to address new issues as they arise. Working with an experienced lawyer and financial adviser can ensure that before changes come into effect you adjust your business structure in a way that minimises your financial exposure.
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What are the common mistakes made by new business owners?
- One of the main mistakes that business owners make is that they don't see the necessity to set up a trust structure from the beginning. This makes it difficult and more expensive to set up later especially when it comes to transferring assets into the trust.
- It is best to consult a lawyer earlier in the process so that you have the right advice and can avoid unnecessary costs.
- Our Phone a Lawyer service may be able to put you in touch with a lawyer for a preliminary consultation.
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As a trustee how can I best protect my personal assets?
- Using a corporate trustee can provide you with a higher degree of asset protection particularly against claims by business creditors.
- Although there is still some liability attributed to the position of directors in a trustee company the protection is much higher than for an individual trustee.
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