At a glance
- Family trusts offer flexible wealth structuring and asset protection whilst allowing control without direct ownership.
- Corporate trustees provide better long-term benefits than individual trustees despite higher initial costs.
- Recent tax office scrutiny demands strict compliance with trust distribution and reporting rules.
For small business owners looking to structure their wealth and protect their assets, family trusts remain a popular and powerful option. However, setting up and managing a family trust comes with both benefits and challenges that business owners should carefully consider.
Fraser Stead, a lawyer at DBA Lawyers who specialises in trusts, notes that family trusts continue to grow in popularity. “We still see a lot of people setting up new trusts,” Stead says. “If anything, they seem to be growing in popularity.”
The primary appeal, according to Stead, is flexibility. “You can just choose what you want to do with that trust income,” he says. “There’s a whole bunch of people you could give it to.
Deciding what you want to do with that investment vehicle is quite powerful through a family trust.”
This flexibility aligns with the sentiment of “own nothing, control everything,” Stead says. A family trust allows business owners to set up ownership structures that provide an extra layer of asset protection compared to holding assets in personal names.
“You can set everything up to be owned in the trust and then you can really decide what you want to do with it,” Stead says. “Which is a lot better for people, especially rather than having things in their personal names that can be problematic for all sorts of reasons.”
Trust structure impacts long-term benefits
However, Stead cautions that how you set up the trust matters, whether to use individual trustees or a corporate trustee structure. While individual trustees are common and initially less expensive, Stead recommends considering a corporate trustee for greater long-term benefits.
“Our view at DBA is that the corporate trustee is really powerful and has a lot more benefits over the long term,” he says. “With a corporate trustee, you can get greater asset protection from third-party claims. There’s greater protection for trustee taxation liabilities, and you get that nice clear separation between what is a trust asset and what is an individual asset.”
The downside is higher upfront costs and ongoing fees. “Setting up a trust is not too expensive, but setting up a new company can be quite expensive,” Stead says. “You get those ongoing ASIC fees each year. People tend to be a little hesitant to pay the extra money, but over the long run it can definitely be more beneficial.”
The Australian Taxation Office (ATO) renewed its focus on trust compliance in recent years. A key area is the broad anti-avoidance provision known as Section 100A. “It seeks to target people when one person receives the distribution on paper, but another person gets the benefit,” Stead says.
The ATO released new guidance in 2022, outlining “red zones” and “green zones” for compliance risk. Failing to notify beneficiaries of their entitlements can move a trust out of the low risk “green zone.” Stead says: “If people have entitlements in your trust, you probably need to be letting them know to avoid falling out of the green zone.”
“The corporate trustee is really powerful and has a lot more benefits over the long term.”
Fraser Stead, Lawyer, DBA Lawyers
In July 2021, a change to the Australian accounting standards required the preparation of general purpose financial statements instead of special purpose financial statements “unless your trust deed expressly states otherwise”, Stead says. This can mean more complex, costly reporting for affected trusts.
Tax implications of trusts
Small business owners should also be aware of the tax implications of using family trusts to own residential property. “Each jurisdiction has foreign person rules,” Stead says. “If you’ve got a foreign trustee or foreign beneficiary, you’re subject to extra tax and extra duty.”
Family trust elections are another area where Stead sees common issues. “If you’re distributing to people outside of your family group after you’ve done a family trust election, you’re going to have extra taxation implications,” he says. The rules around family trust elections can be complex, and some trustees of long-standing trusts can lose track of key details such as the identity of the original “test individual”.
Despite these challenges, family trusts can be a valuable tool for many small business owners. The key is staying on top of ongoing responsibilities and informed about compliance requirements.
“You need to be familiar with what is actually required of you to report on each year,” Stead says. While accountants and financial planners can assist, business owners should have a basic grasp of their trust’s structure and obligations.
For those willing to navigate the complexities, family trusts offer a flexible way to structure business wealth, protect assets, and potentially achieve tax benefits. As Stead says: “Family trusts definitely give you that flexibility to decide what you want to do with that income.”
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