Business Trust

What is a Business Trust?

A business trust is a legal structure where a trustee operates a business for the benefit of beneficiaries, according to a trust deed.

 The business itself is not owned personally by individuals — it’s owned and controlled by the trust.

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 Key parties

• Trustee

  • Runs the business and holds assets on behalf of the trust

  • Can be:

    • An individual, or

    • A company (very common → “corporate trustee”)

• Beneficiaries

  • People or entities who receive profits

• Trust deed

  • The legal document setting the rules (profit distribution, powers, etc.)

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 Common types of business trusts

1. Discretionary Trust (Family Trust) – most common

• Trustee decides who gets the profit and how much

• Popular with small businesses and family enterprises

• Very tax flexible

2. Unit Trust

• Beneficiaries hold units (like shares)

• Profits distributed based on units owned

• Common for:

  • Joint ventures

  • Property and investment businesses

3. Hybrid Trust

• Mix of discretionary + unit trust features

• More complex, less common today

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 How a business trust makes money

• The trust earns income from trading (sales, services, rent, etc.)

• At year-end, income is:

  • Distributed to beneficiaries, who pay tax at their own rates

  • OR taxed in the trust if not distributed (usually at top marginal rate → avoided)

 Trusts don’t pay tax like companies (unless income is undistributed).

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Why people use business trusts

Advantages

Tax flexibility – income can be distributed to lower-tax beneficiaries
Asset protection – business assets separated from personal assets
Succession planning – easier to pass control across generations
Privacy – trusts aren’t public like companies

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Disadvantages

 More complex & costly to set up and run
 Losses cannot be distributed (trapped in the trust)
 Banks may require personal guarantees
 Less suitable for raising external equity

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 Business trust vs company

 

 

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🇦🇺 Australian context (important)

In Australia:

• Most small businesses use a Discretionary (Family) Trust

• Often paired with a corporate trustee for liability protection

• Subject to:

  • ATO trust rules

  • Trust loss rules

  • Division 7A (if companies are beneficiaries)

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In one sentence

A business trust is a flexible structure where a trustee runs a business and distributes profits to beneficiaries, commonly used for tax efficiency, asset protection, and family control.

 

 

While the trust is holding the shares (no sale yet)

 Dividends

When the trust receives dividends:

a) Dividends are taxable in the year received

• Dividends (cash + franking credits) are trust income

• The trust usually distributes this income to beneficiaries each financial year

b) Franking credits

• If the shares are Australian shares:

  • Dividends may be fully or partially franked

  • Franking credits flow through the trust to beneficiaries

  • Beneficiaries include:

    • Cash dividend

    • Franking credit

  • They can use franking credits to offset tax

 The trust itself usually pays no tax if all income is distributed.

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 When the trust sells the shares (after a few years)

 Capital gains tax (CGT)

a) CGT event occurs on sale

• Capital gain = Sale price − Cost base

• The gain is included in the trust’s net income

b) 50% CGT discount

If:
Shares were held more than 12 months
Trust is not a company

 The trust can apply the 50% CGT discount

Example:

• Gain before discount: $100,000

• Discount: 50%

• Taxable capital gain: $50,000

c) Distribution to beneficiaries

• Discounted capital gain is distributed to beneficiaries

• Beneficiaries pay tax at their own marginal tax rates

 Trust does not pay CGT itself if gains are fully distributed.

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 What if income or gains are NOT distributed?

• Undistributed income is taxed in the trust at the top marginal rate (~47%)

• This is why trusts almost always distribute all income

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Special points people often miss

 Losses

• Capital losses cannot be distributed

• Losses stay in the trust and can only offset future capital gains

 Streaming

• Trusts may be able to stream capital gains and franked dividends to specific beneficiaries (depends on deed wording)

 Non-resident beneficiaries

• Different withholding and tax rules apply

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 Simple example (realistic)

Facts

• Family trust buys $200,000 of Australian shares

• Holds for 3 years

• Receives $8,000/year in fully franked dividends

• Sells shares for $300,000

While holding:

• $8,000 dividends + $3,429 franking credits per year

• Distributed yearly to beneficiaries

• Beneficiaries pay tax (franking credits reduce tax)

On sale:

• Capital gain = $100,000

• 50% CGT discount → $50,000 taxable

• $50,000 distributed to beneficiaries

• Beneficiaries taxed at their rates

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 How this compares to other structures

 

 

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 Key takeaway

An investment trust holding shares long-term pays no tax itself if income and gains are distributed.
Dividends are taxed yearly, and capital gains are taxed when shares are sold, with a 50% CGT discount after 12 months, and beneficiaries pay tax at their own rates.