Is a family trust right for your business? A family trust is often set up when there’s a new business opportunity, a business expansion, or a need to structure investments properly. There are tax benefits when a family trust is set up correctly but it’s important to understand its purpose to determine how it can benefit you and if it’s the right choice for your business.
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If you operate a family business and your profits start to grow or you start to employ more staff, it’s time to consider setting up a family trust. A family trust can help minimise your tax rate if your average tax rate is almost at 30 per cent. A family trust can also act as a holding structure when making significant investments as it can save you tax and protect your assets from legal and financial troubles.
Before setting up a family trust though, you should carefully think and plan for the future of your business and investments.
With a family trust, capital gains and income can be distributed in proportions across a family group and suit each member’s tax rates, making it a tax-effective structure to hold investments. If the profit gets too large to effectively distribute, it can distribute to a separate company to cap at a 30 per cent tax rate. If an investment is sold, the trust can receive capital gains concession and income can once again be distributed among family members.
If your business runs from a family trust, you can set up a company as its trustee and access its limited liability benefits while taking advantage of the tax flexibility of a family trust. It is a separate entity and can protect the assets of your family because these are not held in your personal name.
However, a family trust can’t add additional shareholders or other people outside your family. If your business grows and your profits exceed $500,000 per annum, it can be difficult to make it tax effective – it is then that a company becomes a better option. It also offers limited ways of accessing funds as operating a family trust won’t give you access to many tax concessions and government grants such as R & D tax concession or Early Stage Investor Concessions. A family trust needs on-going tax and accounting advice.
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Similar to a company structure, a family trust needs to prepare annual financials and lodge a trust tax return. The profit is calculated at the end of the financial year and distributed to the beneficiaries as their assessable income. The trust does not pay tax; the beneficiaries are taxed on the income placed in their name. If the income exceeds $75,000, it is required to register for GST.
Before setting up a family trust, consider if you’re expecting more people to join your business and if anyone is likely to exit the business. Do you intend to sell your business for a large capital gain or issue shares to employees? Consider whether you plan to use government grants or tax concessions or if you’re ready to keep strict financial records.
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As you look for different ways to grow and improve your business, seeking professional advice could prove to be an important and helpful decision.
You can click here to speak to a business, accounting and bookkeeping firm. We also offer hospitality business consultation and mortgage services. We will give you a call to know more about your needs. We will explain to you how we can improve your business.
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