Business Structures 101- Trust Business
A Trust business structure is not a separate legal entity such as a company as it is a legal relationship between a ‘trustee’ and one or more people called the ‘beneficiaries’. In this business structure a trustee holds property or assets to benefit the beneficiary or beneficiaries, if more. A trustee is legally responsible for the operation and management of a trust. Compared to other business structures, a trust can be expensive and may require a great deal of reporting and legal paperwork to set up. A Trust is dealt between three parties:
- The Settlor – The settlor is the one who creates or forms the trust and transfers assets into a trust.
- The Trustee – A trustee can be a person or a company who holds the assets for the benefit of the beneficiaries as the settlor cannot act as a trustee.
- The Beneficiary - The beneficiary (one or more) is the one for whom the legal trust is formed. The beneficiary is not liable for any debts or other responsibilities of the trust as they have nothing to do with the trust’s business. The Trustee can be one of the beneficiaries but cannot be the ONLY beneficiary as that might invite legal problems.
Types of Trusts
- Discretionary Trust – This type of trust is also called a ‘Family Trust’ and its main purpose is to benefit the family. This type of trust is often operated for family business as well. In a discretionary trust, the trustee is responsible to determine when and how the beneficiaries will receive income. The distribution of income is not fixed in this type of trust and it is solely up to the trustee to decide how and when the beneficiaries will receive the income.
- Fixed Trust – In a Fixed Trust, the income or the amount is proportionately distributed amongst all the beneficiaries. The proportion of income is termed and carried out by the trustee and it is entirely his/her decision as to how the distribution will be designed keeping everyone’s welfare in consideration.
- Unit Trust – A Unit Trust is similar to a company where shareholders hold shares. In this scenario, a beneficiary holds units in a trust just like a shareholder holds shares in a company. Beneficiaries who hold most units get hold of more income and assets from the trust.
Mentioned below are all the features to set up a Trust Business Structure which will help you decide if this is the right business structure for you.
Australian Business Number
In order to start a Trust enterprise in Australia, a trustee must register for an Australian Business Number (ABN).
Tax File Number (TFN)
It is important for you to have a Tax File Number for your Trust to use it when lodging for annual tax return.
The income earned by the trust is distributed amongst the beneficiaries. Everything in respect to the tax process is controlled and managed by the trustee. Depending on the type of trust, it is determined whether a trust is liable to pay tax or not.
When the net trust income is distributed to non residents or minors, the Trust is assessed and is liable to pay tax.
In case the entire net Trust income is distributed amongst adult beneficiaries, the trust is not liable to pay tax. To know more about how a trust can file for tax return click HERE.
If a Trust is operating as a business, all the income earned by the Trust must be lodged for trust tax return each year. The tax return also shows the details and amount distributed to each beneficiary.
A Trust is allowed to employ people but in this case, the trustee will be held responsible for the employees including their payrolls, taxes and superannuation payments.
A Trust business structure is allowed to employ workers and every eligible employee is entitled to receive a minimum of 9% of their usual time earnings as a super guarantee contribution on behalf of the trust. A trustee may also be entitled for superannuation if he/she is employed in the trust.
Duties of a Trustee
A trustee’s responsibilities are very complex and needs to be fulfilled by a faithful trustee. These responsibilities are legal and some are governed by the law. Mentioned below are the obligations and duties of a trustee:
- To be transparent and clear with all beneficiaries
- To be faithful towards his/her job
- Avoid partiality and conflicts
- Not to cheat with beneficiaries
- Not to steal or act for own profit
- To keep proper records of accounts
- To learn all about his/her duty in and out
How to Register a Trust Business
- Decide and register a business name
- Make sure that the name you select isn’t already being used HERE
- Register you business name
- Apply for necessary licence and other registrations
These factors should help you determine if Trust is the right business structure for you.