One of the most conventional methods in Australia to operate a family business is through the use of a trading trust – effectively a discretionary trust used for trading. The trust is generally constituted by way of a deed of settlement where a person (the settlor) contributes a notional amount as the initial capital of the trading trust and subsequently designates a trustee to be responsible for the trading trust. Corporations and individuals can act as trustees, however a corporate trustee is generally preferable. The operators of the business are generally in control of the trading trust company as they are generally appointed as the shareholders and directors of the trustee company.
The trading trust deed generally includes provisions for an appointer, who usually is given the authority to appoint and remove trustees. A trading trust in some circumstances may nominate a guardian whereby approval would need to be granted in the situation that a trustee proposes to transact in relation to beneficiaries.
Usually where there are profits made after the payment of any business expenses, the profits for the end of any financial year may be distributed to the beneficiaries of the trading trust in a manner that would generally be tax-effective in nature.
Broadly speaking some of the advantages of a trading trust are:
- The trading trust structure is such that it can provide flexibility in the administration and management of the trust;
- Depending on how the trust deed is drafted, there may be the ability to distribute the income amongst beneficiaries of the trading trust, thereby potentially reducing the tax liability that may be created as a result of the income made by the business that is managed by the trust;
- A trading trust with a corporate trustee can provide some protection to family members from liabilities created by the business; and
- The life span of the trust can be longer than the life of the beneficiaries of the trust. Therefore in the situation where a beneficiary of the trust passes on, the business can continue to operate under the trust and may not trigger liability for the payment of Capital Gains Tax (CGT).
You can obtain further information or legal advice on trading trusts by contacting our firm on (02) 9233 4048 to speak to a Sydney Trusts Lawyer or Sydney Asset Protection Solicitor.
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