Because Australia does not have limited liability tax-transparent business vehicles such as US limited partnerships, LLPs or LLCs or Subchapter S Corporations, many Australians use trading or investment trusts.

Trusts have advantages over partnerships.  They can provide greater flexibility and can provide more limitation of liability.

But if you run a trust, you should know that you can be held to account for “breach of trust”.

The main advantages and disadvantages of a trust are as follows:

  • you can enjoy limited liability provided directors of trustee company do not commit insolvent trading
  • but the trustee must record minutes of various decisions and sometimes allow access to records by beneficiaries
  • you can put funds can be freely put into the business with no regulatory restrictions or tax consequences
  • but the contributed funds become subject to legal obligations to beneficiaries
  • subject to the trust deed, funds may be withdrawn from the business and paid to beneficiaries
  • no beneficiary over 18 can be forced to leave credited shares of income in the  business
  • beneficiaries may use the Court to remove a trustee accused of improperly removing funds from trust or denying beneficiaries’ rights
  • undistributed trust income taxed at top personal marginal tax rate
  • distributed income is taxed at individual or corporate rate of beneficiary
  • losses cannot be distributed and used in same year but must be carried forward and may be cancelled
  • franking credits on dividends cannot pass through a discretionary trust unless a family trust
  • but a family discretionary trust has restricted beneficiaries
  • there is flowthrough of surplus cashflow representing deductions and CGT discount
  • trusts “vest”, that is, come to an end, triggering potential capital gains tax and stamp duty liabilities