A common vehicle to operate a family business is by way of a discretionary family trust or trading trust.

A discretionary trust is created by a deed of settlement where a settlor provides a nominal amount as the initial capital of the trust and appoints a trustee to administer the trust. Both individuals and corporations are capable of acting as trustees but a corporate trustee is preferred. The business operators maintain control of the trustee company as its directors and shareholders.

The trust deed includes provision for an appointer who has the power to appoint and remove trustees. The appointer is usually the business's key promoter.

Modern trusts also identify a guardian whose approval has to be obtained where a trustee proposes to deal with the trust fund with respect to beneficiaries.

Any profits after payment of business expenses are distributed at the end of the financial year to the beneficiaries in a way that permits the distribution to be tax-effective.

It should be noted that beneficiaries in the trust have no absolute right to income or the assets and therefore there can be some protection of assets if a claim is made against an individual beneficiary.

The main advantages are:

• The trust structure is capable of providing the maximum flexibility of management and administration;
• Provided that the terms of the trust are drawn correctly there is an ability to split income between beneficiaries and reduce the tax liability created by the income generated by the business operated by the trust;
• A trust with a corporate trustee can provide some protection to family members from liabilities created by the business;
• The life of the Discretionary Trust may be longer than the life span of the individual beneficiaries or members so that on the death of the business promoter or key personnel, the business continues under the trust and does not trigger a potential capital gains tax (CGT) liability.

Our contacts:
Janelle Brown Partner
Trevor Kuhle Accredited Specialist