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Business Trust

A trust is an arrangement whereby a settler (creator of faith or founding member ) designates some persons as trustees to manage particular assets on behalf of a Beneficiary.

Trust is a commonly used form of business entity for trading purpose in Australia.

Taxability of income of Trust:

The income of the trust is completely pass through, and it is taxed in the hands of the beneficiary. The revenue has to be distributed to the recipients in the relevant financial year otherwise the same would be considered as retained income and it would have tax implications. The income retained in the business would be taxable at the maximum marginal tax rate.

Types of Trust:

Unit Trust:

In unit trust, the beneficiaries own a specific number of units in the trust. Unitholder has a particular share in the income of faith like a shareholder of the Company.
It is an extension of trust for business where there is a requirement to have an individual share for each of the partners.

Discretionary trust:

A discretionary trust is generally used by family-owned entities where it offers the flexibility of income distribution to the beneficiaries. However, the income has to be distributed only to people who qualify as beneficiaries. However, there is no compulsion for distributing the income in specific proportion as they do in a previous year.

Components of trust:

Benefits of Forming a trust:

  • Tax Planning by savings in total income tax payable.
  • Asset protection from Bankruptcy and insolvency.
  • The trust assets directly pass on to the beneficiaries on the death of the settlor without any legal complications.

Cons of forming a trust:

  • Changing legislation governing trusts.
  • Cost of Maintaining trusts.
  • Losses cannot be distributed.
  • Taxability of profits at maximum marginal tax rates.

This article does not constitute advice. This article is to be used as a general guide for our clients for their private information Read More.

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