When I first started in tax, many self managed entities (SME) or Small Business Entities (SBE) operated through discretionary trust structures.
They were an attractive proposition. Discretionary trust structures offer flexibility in how income is to be taxed. Typically trusts are non income tax paying entities (there are exceptions of course) and assessable income derived by the trust can be spread around a number of eligible beneficiaries, utilizing lower marginal tax thresholds of individuals within the family group, and even parking distributions with "bucket companies" ensuring that the effective tax rate across the family group doesn't exceed the company tax rate.
Trust structures are also eligible for the general 50 % CGT concession which is an attractive proposition later down the track when it comes time to exit, and realize a capital gain on disposal of the business.
Tax is an ever changing field however, and over time corporate structures have become more popular in conducting business structures. With everything, you need to assess the pros and cons. But the main benefit is that companies can retain profits which they can in turn use to reinvest into the business. Trusts need to distribute income on the conclusion of each financial year to eligible beneficiaries otherwise the Trustee is assessed at the top individual marginal rate (currently 47% - including the medicare levy).
The inability to retain profits makes it difficult to grow the business organically.
Also worth considering is that discretionary trusts don't actually provide a clearly defined interest to beneficiaries in the underlying business or assets held by the trust. The Trustee may grant you income one year, but there is no guarantee that you may receive income in a subsequent year. That's because the Trustee has the discretion (sometimes with the permission of the guardian) to distribute trust income however which way they like.
This may be perfectly fine in a family group, but it's definitely not something to pursue with unrelated business partners on an arms length basis. It might not even be something to pursue from a family group - depending on the family dynamics.
More to come. 🙈🙉🙊
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