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Unlike a company, a trust is not a separate legal entity. Trusts are often used in connection with running a business for the benefit of others.
A trust is a structure where a trustee (an individual or company) carries out the business on behalf of the members (or beneficiaries) of the trust.
Family businesses are often set up as a trust so that each family member can be made a beneficiary without having any involvement in how the business is run.
A trust is set up through a trust deed and there are two main types:
The trustee has discretion in the distribution of funds to each beneficiary. The most common example is the family trust.
Unit trusts are recommended when more than one family is involved. The interest in the trust is divided into units, similar to shares. Each unit holder may have a number of units in the trust. Distribution from the trust is determined according to the number of units held.
Importantly, trustees are legally liable for the debts of the trust. They can use the assets of the trust to meet those debts. However, if there's a shortfall, they are responsible for covering the difference from their own resources.
A trustee must apply for a Tax File Number (TFN) and lodge an annual trust return. The trust is not liable to pay tax, tax is assessed to the trustee or to the beneficiaries that are entitled to receive the trust net income.