Different Business Structures: Part 5: Discretionary Trust

A discretionary trust is one of the most common small business structures in Australia. This is sometimes called a “family trust”.

In an ordinary discretionary trust, the beneficiaries do not have a fixed entitlement or fixed interest in the trust funds.

The trustee has the discretion to determine which beneficiaries are to receive the capital and income of the trust and how much each beneficiary is to receive. However, the trustee does not have a complete discretion where the trustee can only distribute to beneficiaries within a nominated class as set out in the trust deed.

Advantages and disadvantages of a discretionary trust are:

Advantages of Discretionary Trust

  • Streaming of income to lower tax rate beneficiaries
  • The small business concessions can flow to the ultimate owners with no reduction in value
  • Trust deed can be tailored to the needs of principals and beneficiaries
  • Can make flexible distributions of income and capital
  • 50% discount method for work out CGT is available
  • The small business concessions can be accessed.
  • For income distribution, you can employ principals and provide salary packaging.
  • Simple to wind up
  • Asset protection available through correctly drafted trust deed
  • Extra asset protection available through use of a corporate trustee

Disadvantages of Discretionary Trust

  • Unless class of beneficiaries is sufficiently broad when trust established risk of resettlement when beneficiaries added.
  • Accumulated income is taxed at top marginal rate
  • Losses are trapped in the structure
  • The complex trust loss provisions apply
  • Cannot transfer losses to other controlled entities like companies
  • Clients can have trouble understanding all terms of deed
  • More costly than sole trader and/or company
  • Beneficiaries can be subject to complex PAYG calculations
  • May be restricted in who it can deal with after making a family trust election
  • Varying the terms or objects of the trust can amount to a resettlement and have CGT and stamp duty consequences
  • Trustees can be personally liable for the debts of the trust

Other articles in this series:

This article has been prepared for the purposes of general information and guidance only. It should not be used for specific advice or used for formulating decisions under any circumstances. If you would like specific advice about your own personal circumstances please contact our office.