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Best Asset Protection Strategies for Small Business Owners

As a small business owner, it’s crucial to implement asset protection strategies to safeguard your personal assets in case of business-related lawsuits or debt obligations. When businesses face financial difficulties, creditors often look to seize personal assets as a means of recouping losses. Without a proper asset protection plan, your assets may be at risk. In Australia, there are several effective methods available to help separate your business affairs from your personal assets, reducing the likelihood that your personal wealth will be impacted by business-related financial issues.

Key Asset Protection Strategies

There are a variety of asset protection strategies to help small business owners protect their personal wealth:

Business Insurance: Having comprehensive business insurance can be a first line of defense against certain risks, such as property damage or liability claims.
Transferring Assets to Your Spouse: By transferring certain personal assets, like property or investments, to a spouse or family member, you can protect them from business creditors.
Business and Personal Separation: Maintaining a clear distinction between your business and personal life is essential. This includes keeping separate financial accounts and records, as well as ensuring your business and personal assets are distinct.

Asset protection not only applies to physical assets like real estate, vehicles, and equipment, but also extends to financial assets, including bank accounts, investments, and retirement accounts. Additionally, intellectual property such as patents, trademarks, and copyrights can also be protected.

What is the Best Strategy?

The ideal asset protection strategy varies based on your specific situation and goals. However, one common principle in most effective strategies is creating a clear division between your business and personal assets. This separation limits the scope of creditors’ access to only business-related assets, helping to preserve personal wealth in case of financial hardship or legal action.

In most cases, seeking advice from a qualified professional is crucial. A legal or financial expert can help determine the most suitable structure and strategies for your business, ensuring your personal assets remain protected.

Why Business Structures Matter

The business structure you choose can play a major role in protecting your personal assets. Common structures like sole proprietorships or partnerships may not offer sufficient protection. In these structures, there is little distinction between the business and the individual owner, which can leave personal assets vulnerable.

For better protection, consider establishing a company or trust. These entities provide clear separation between your business and personal assets, minimizing the risk of losing personal wealth in the event of a lawsuit or debt collection.

Sole Trader/Partnership: Offers little protection for personal assets.
Company/Trust: Provides a distinct separation of business and personal assets, improving asset protection.

Why a Trust Structure Is Important

In Australia, using a trust, particularly a discretionary trust (commonly known as a family trust), is one of the most effective asset protection strategies. This structure provides flexibility and control over your assets while protecting them from potential risks. When you transfer assets into a trust, you separate them from both your personal and business assets, making them less vulnerable to claims from creditors or legal actions.

Key benefits of a discretionary trust:

Flexibility in distributing income and assets to beneficiaries.
Protection of assets from personal and business-related claims.
Greater control over asset distribution and management.

Asset Protection Methods

Some common asset protection strategies include:

Legal Entities: Establishing trusts, corporations, or limited liability companies (LLCs) to separate personal assets from business liabilities.
Insurance: Obtaining comprehensive insurance coverage to protect against risks such as property damage, liability, or business interruptions.
Homestead Exemption: Using homestead exemption laws to protect your primary residence from certain creditors.
Estate Planning: Structuring your estate plan to ensure your assets are distributed according to your wishes while offering protection.
Retirement Accounts: Contributing to superannuation funds, which are generally protected from creditors.

Conclusion

Asset protection is essential for small business owners to safeguard personal wealth against business risks. Implementing the right strategies and business structures can create a solid foundation of protection, ensuring your personal assets are not jeopardized in the event of business debt or legal action. Here are some key takeaways:

Create Separation: Keep personal and business assets distinct.
Choose the Right Structure: Opt for a company or trust to provide legal protection.
Consult Experts: Work with legal and financial professionals to tailor your asset protection strategy.
Leverage Insurance and Trusts: Use insurance and consider establishing a discretionary trust for added protection.

By employing these strategies, you can protect your personal assets and focus on growing your business with greater peace of mind.

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The material on this page and on this website has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained on this page and on this website is General Advice and does not take into account any person’s particular investment objectives, financial situation and particular needs.

Before making an investment decision based on this advice you should consider, with or without the assistance of a securities adviser, whether it is appropriate to your particular investment needs, objectives and financial circumstances. In addition, the examples provided on this page and on this website are for illustrative purposes only.

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Advantages and Disadvantages of Testamentary Trusts

Testamentary trusts offer many benefits, particularly when it comes to asset protection. Their unique structure, which separates control and benefit, ensures that assets are safeguarded from legal actions and beneficiaries who may make poor financial decisions. By keeping the estate intact, testamentary trusts help protect your estate from potential bankruptcy and court orders. However, while the advantages are appealing, it’s important to weigh them against the potential disadvantages. Here’s a deeper look into the pros and cons of testamentary trusts.

Advantages of Testamentary Trusts

Asset Protection
One of the primary benefits of a testamentary trust is its ability to protect assets from legal action and from beneficiaries who may not handle financial matters wisely. Because the assets are held within the trust and not directly by the beneficiaries, they are less vulnerable to claims from creditors or legal disputes.
Tax Advantages
Testamentary trusts provide significant tax benefits, particularly in terms of income, capital gains, and franked dividends. Income distributed to beneficiaries from the trust is not taxed at the trust level but is taxed at the beneficiaries’ marginal tax rates. Trustees have the flexibility to distribute income in a way that minimizes tax liabilities. For example, they can distribute income to beneficiaries in a manner that leverages lower tax brackets. This means more of the estate’s wealth stays in the hands of your beneficiaries.

Additionally, tax concessions apply not only to assets at the time of death but also to assets the trust acquires using the funds from the original estate. This makes the trust more tax-efficient in the long run.

Pension Benefits
Testamentary trusts can also have advantages for beneficiaries who are eligible for pensions. Since the trust’s assets aren’t considered when determining pension eligibility, beneficiaries can still receive their full pension benefits while enjoying distributions from the trust.
Capital Gains Tax
When assets are transferred to the testamentary trust, there is typically no capital gains tax on the transfer itself, nor on proceeds from life insurance policies or superannuation death benefits. This ensures that the bulk of the estate value is preserved for the beneficiaries.

However, depending on the jurisdiction, capital gains tax may apply to assets acquired by the trustee after the death, so it’s important to consider this factor.

Disadvantages of Testamentary Trusts

Taxes on the Family Home
One potential drawback is that the family home, if held in the testamentary trust, may lose its capital gains tax exemption. The impact of this can vary depending on your financial situation and location, so it’s essential to seek advice from a financial adviser to understand how this might affect your estate.
Cost of Administering the Trust
Administering a testamentary trust comes with costs. If you appoint a professional trustee, you will incur fees. There are also ongoing costs for accounting services and tax preparation. These administrative fees can diminish the value of the estate, so it’s crucial to assess whether the benefits of the trust outweigh the costs.

For those uncertain about the benefits, a testamentary trust can be included as an option in the will, allowing the trustee to decide whether it is appropriate to implement.

When a Trust May Be Beneficial for Asset Protection

Testamentary trusts can be particularly valuable in specific situations:

High-Risk Beneficiaries
If any of your beneficiaries are in high-risk professions, such as law enforcement, military service, or owning a business exposed to negligence claims, a testamentary trust can shield their inheritance from potential liabilities.
Creditor Protection
Testamentary trusts can protect the inheritance from creditors, ensuring that beneficiaries’ debts do not diminish their share of the estate. It can also protect their inheritance from a spouse’s business liabilities or financial issues.
Education Funding
A testamentary trust can be an excellent tool for leaving money for a beneficiary’s education, including tuition and boarding school fees. The tax efficiency of the trust makes it a viable option for funding educational costs.
Divorce Protection
Assets in a testamentary trust are not considered personal property, which means they are not subject to division in the event of a beneficiary’s divorce. This ensures that your child’s inheritance remains protected.
Protection Against Remarriage
A testamentary trust can ensure that your surviving spouse doesn’t remarry and divert the estate to a new family, or squander it on unwise ventures. This type of trust gives you more control over how the estate is handled.
Children with Issues
If you have children with tendencies toward poor financial decisions, such as addiction or reckless spending, a testamentary trust can safeguard their inheritance and ensure it is used responsibly.
Disabled Children
For children with disabilities, a testamentary trust ensures that the inheritance is managed appropriately and used for their well-being. It can provide financial security without risking the loss of government assistance or benefits.

Conclusion

Testamentary trusts offer valuable asset protection and tax benefits, especially for those with complex family situations, high-risk beneficiaries, or specific estate planning goals. They provide control over how assets are distributed, offering peace of mind that your wishes will be respected, even in difficult circumstances like divorce, remarriage, or financial mismanagement by beneficiaries. However, it is important to consider the costs involved, the potential tax implications on the family home, and whether the benefits outweigh the administration fees. By carefully evaluating your personal situation and consulting with a financial adviser, you can determine whether a testamentary trust is the right tool to protect your estate and provide for your loved ones.

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Capital Gains Tax Consequences of Separation and Divorce

With approximately one in three marriages ending in divorce, and numerous de facto relationships breaking down, understanding the capital gains tax (CGT) implications of separation has become increasingly important. The Australian Taxation Office (ATO) provides specific rollover provisions that can defer CGT liabilities when assets are transferred between separating parties, but these provisions come with critical conditions that must be met.

CGT Rollover Provisions Explained

The CGT rollover provisions allow for the deferral of any capital gains that would typically arise from the transfer of assets during a separation. This means that neither party incurs immediate CGT liabilities when they transfer assets to one another as part of the divorce or separation settlement. However, it is essential to navigate these rules carefully to ensure compliance and optimize tax outcomes.

Key Conditions for Rollover

Method of Transfer: The transfer of the asset must occur via a relevant court order or a defined financial or maintenance agreement. Parties looking to realize a capital loss on an asset should avoid transferring it under these provisions; instead, a private agreement outside the specified methods could be advantageous.
Transfer to Spouse Only: The rollover does not apply if the asset is transferred to a spouse’s discretionary trust or private company. It must be transferred directly to the other spouse, with the only exception being a transfer to a “child maintenance trust,” which has its own stringent conditions.
Eligible Assets: Not all assets qualify for CGT rollover. For instance, trading stock is excluded and subject to standard disposal rules outside regular business operations. Furthermore, while the rollover allows for deferred tax liabilities, it does not eliminate them. The acquiring spouse inherits the original cost base of the asset, which is crucial for calculating future capital gains or losses.

Special Considerations for Dwellings

An important and often overlooked aspect arises when the transferred asset is a dwelling, such as a rental property that is later used as the spouse’s home. In such cases, the acquiring spouse may face CGT on any gain accrued during the time the property was rented out, despite it becoming their primary residence. This nuance underscores the need for careful negotiation and clear communication between separating parties.

Planning Opportunities

To navigate the complexities of CGT during a separation or divorce, parties should consider the following strategies:

Assessment of Assets: Before asset transfers, parties should conduct a thorough assessment of the potential CGT implications for each asset. This evaluation can help in making informed decisions that align with financial goals.
Professional Advice: Engaging tax professionals or financial advisors can provide clarity on the tax consequences of asset transfers. Their expertise can help ensure that all legal requirements are met and that both parties understand the implications of their choices.
Negotiation Strategies: Clear and open negotiations can help identify solutions that minimize tax liabilities. For example, structuring asset transfers in a way that is mutually beneficial can lead to better financial outcomes for both parties.

Conclusion

The capital gains consequences of separation and divorce are intricate and can significantly impact the financial wellbeing of both parties. While the CGT rollover provisions offer a means to defer tax liabilities, strict conditions and potential pitfalls require careful navigation. By understanding these rules and seeking professional guidance, separating couples can better manage their tax implications and make informed decisions during this challenging time.

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Why Asset Protection Is Essential for First Home Buyers and Property Investors

For first home buyers and property investors, asset protection is a crucial yet often overlooked aspect of financial planning. As you embark on the journey of purchasing your first home or investing in real estate, securing your assets from potential risks and liabilities should be a top priority. Here’s why asset protection is vital and how you can safeguard your investments effectively.

Understanding Asset Protection

Asset protection involves strategies and legal structures designed to shield your assets from potential risks such as creditors, lawsuits, or unforeseen financial difficulties. For first home buyers and property investors, this means taking steps to protect your property and investments from threats that could compromise your financial security.

Shielding Against Legal Claims

One of the primary reasons for asset protection is to safeguard your assets from legal claims. In the event of a lawsuit or legal dispute, your personal assets could be at risk if you’re found liable. For property investors, this is particularly pertinent as investment properties can be subject to various legal challenges, from tenant disputes to property-related accidents. By employing asset protection strategies such as creating trusts or holding property in a company structure, you can reduce the risk of personal liability.

Protecting Against Financial Risks

Investing in property involves significant financial outlay, and with it comes the risk of financial strain. Unexpected events such as market downturns, high vacancy rates, or sudden repairs can impact your cash flow. Asset protection strategies can help mitigate these risks by separating your personal finances from your investment assets, ensuring that a financial setback in one area doesn’t jeopardize your entire financial well-being.

Ensuring Financial Privacy

Asset protection also plays a role in maintaining financial privacy. By structuring your investments through entities such as trusts or companies, you can keep your personal financial details confidential. This separation helps protect your personal information from public scrutiny and potential misuse, especially in high-stakes investment scenarios.

Facilitating Succession Planning

For property investors, asset protection is integral to effective succession planning. Properly structured asset protection can ensure that your investment properties and other assets are passed on according to your wishes, minimizing disputes and tax implications for your heirs. Trusts, for instance, can be used to manage and distribute assets efficiently, providing peace of mind that your estate will be handled in line with your plans.

Enhancing Risk Management

Effective asset protection contributes to overall risk management. By understanding and implementing strategies to protect your assets, you can proactively address potential risks before they become significant problems. This includes setting up appropriate insurance coverage, maintaining detailed records, and employing legal structures to mitigate exposure to risks.

How to Implement Asset Protection Strategies

Consult with Professionals: Seek advice from financial planners, accountants, and legal experts specializing in asset protection. They can help you tailor strategies to your specific circumstances and ensure compliance with relevant laws and regulations.
Consider Legal Structures: Explore different legal structures such as trusts, companies, or joint ventures to hold your assets. Each structure offers distinct benefits in terms of liability protection, tax implications, and management flexibility.
Obtain Adequate Insurance: Ensure that you have comprehensive insurance coverage for your property and investments. This includes property insurance, liability insurance, and income protection insurance to cover potential risks.
Implement Risk Management Practices: Regularly review and update your asset protection strategies to address changing circumstances and risks. This includes maintaining accurate records, conducting risk assessments, and staying informed about legal and market developments.
Plan for the Future: Develop a clear succession plan for your assets and investments. This involves making decisions about how your assets will be managed and distributed in the event of your absence, ensuring that your wishes are honored.

Conclusion

Asset protection is a fundamental aspect of financial planning for both first home buyers and property investors. By implementing effective strategies to safeguard your assets, you can reduce risk, ensure financial privacy, and facilitate smooth succession planning. Prioritizing asset protection not only enhances your financial security but also provides peace of mind as you navigate the complexities of property ownership and investment.

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Divorce, you, and your business

Breaking up is hard to do. Beyond the emotional and financial turmoil divorce creates, there are a number of issues that need to be resolved.

What happens when there is a family company?

For couples that have assets tied up in a company, the tax consequences of any settlements paid from the company will need to be assessed. Settlements paid out by a corporate entity can sometimes be treated as taxable dividends and taxed at the relevant spouse’s marginal tax rate. If you are receiving assets from a corporate entity as part of a property settlement, it’s essential that you understand the tax implications prior to settlement, or a sizeable portion of the settlement could go to the ATO. For business owners, outside of the tax and financial issues, it’s important to not lose focus on what’s important to keep the business running efficiently.

What happens to your superannuation in a divorce?

A spouse’s interest in superannuation is a marital asset and can be split as part of the breakdown agreement. It’s important to be aware however that superannuation cannot be paid directly to a spouse unless the spouse is eligible to receive superannuation (they have met a condition of release) but it can be rolled over into the spouse’s fund until they are eligible to receive it. Laws exist to prevent taxes such as CGT being triggered when superannuation assets are transferred. This is particularly important where your superannuation fund holds property.

A Court order or Superannuation Agreement is required to give effect to the agreed split in the SMSF assets or to execute a rollover eligible for the CGT rollover concession.

If you have an SMSF and both spouses are members, it’s important to get advice to make sure that all of the appropriate administrative issues are taken care of. Where a divorce is not amicable, it’s important to keep in mind that the SMSF trustee is required under law to act in the best interests of the fund and its beneficiaries. Anything less and the fund members may seek compensation for loss or damage.

Can you protect both parties from divorce?

In a divorce, assets are split based on a multitude of factors such as earning capacity, maintenance of children, and the assets held pre-marriage. Many couples don’t go through their marriage with an equal view of how assets and income should be attributed until something goes wrong. If there is a disparity between the income levels of each spouse, there are a lot of benefits to the household in general of evening out how income flows through to the family. If your partner earns less than you, there is a very real financial benefit to topping up their super as superannuation has preferential tax rates. The same goes for taxable income. If you can even out income coming into the household, it spreads the tax burden. Good planning can make a difference.

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What is a Trust

Although trusts are common, they are often poorly understood. Setting up a trust is often driven by a new business opportunity, a growing business, or a need to better structure your investments. When set up correctly, there are clear tax benefits when it comes to operating as a family trust.

The importance of the correct structure in which to hold your investment, (be it property or any other) and its correct use could mean the difference between losing or retaining your assets and the paying or not paying of hundreds of thousands of dollars in excess tax over the longer term. Trusts are a fundamental element in the planning of business, investment, and family financial affairs. There are many examples of how trusts figure in everyday transactions.

Why a Trust and which kind?

Apart from any tax benefits that might be associated with a trust, there are also benefits that can arise from the flexibility that a trust affords in responding to changed circumstances.

A trust can give some protection from creditors and can accommodate an employer/employee relationship. In family matters, the flexibility, control, and limited liability aspects combined with potential tax savings, make discretionary trusts very popular. There are strengths and weaknesses associated with trusts and it is important for clients to understand what they are and how the trust will evolve with changed circumstances.

You should always obtain advice from a specialist tax adviser and a solicitor when considering setting up a trust. Although a trust can be established without a written document, it is preferable to have a formal deed known as a declaration of trust or a deed of settlement.

All types of trusts (with the exception of Superannuation Trusts) established in either NSW, NT or Victoria need to be duty stamped upon execution.

How Family/Discretionary Trusts Operate

A discretionary trust or family trust is a common type of trust used to hold assets or run a family business. It is one of the most common trust structures. Essentially, it is a relationship where a trustee holds property or assets for the benefit of a beneficiary or beneficiaries.

The one who holds the assets is called a trustee. A trust is not a legal entity and it requires the establishment of a legal entity to enter into agreement for it on behalf of the trust. Trustees can either be an individual or a company.

The Trust is the relationship or structure between trustees and beneficiaries. You could think of a Trust as a container of sorts, that things are placed within. All assets placed into the container become property of the Trust, controlled by the trustee for the sake of the beneficiary. See the diagram below:

Who are parties to a Trust?

The Trustee

The trustee can be an individual, individuals or a company and they are the legal entity who owns the assets and makes decisions on the trust’s behalf. There can be more than one trustee and more than one beneficiary. In most cases, the trustees are usually parents or a company that they own, and the beneficiaries are their children or dependants.

The trustee owns and controls the business’ assets, distributes income, and must comply with the obligations of the trust deed and act with the best interests of the beneficiaries in mind. The trustee is also responsible for registering the tax purposes, lodging tax returns and meeting any other tax obligations on behalf of the trust.

Who will be Trustee?

Note as the decision maker, the trustee will be held responsible for actions by the trust, as is the case with any owner. We would normally recommend a company to be the trustee as the company would not own any assets and as such gives you an extra layer of protection, especially if you own assets in your name. If you as an individual are trustee, then your personal assets may be at risk in the event of legal action against the trust which insurance will or does not cover.

Beneficiaries

The beneficiaries are the people entitled to the income and assets of the trust. The beneficiaries of the trust are usually members of a family (family group), as well as companies and trusts that are controlled by that family. For example, the primary or default beneficiaries may be a parent or parents and the secondary beneficiaries maybe children, grandparents, companies etc.

The role of the default beneficiary is to receive and/or decide the direction of any funds that aren’t allocated by the trustee. It’s also important to note that you cannot change the default beneficiary without triggering capital gains tax and stamp duty. Beneficiaries will generally include their share of the trust’s net income as income in their own tax returns and if they receive income from other sources they will be taxed for these as well.

Primary Beneficiaries

You need to identify the primary beneficiaries by name. Depending on the deed the beneficiaries can be changed at any time and you can make distributions to anyone even if you do not identify them here. With certain deeds there may be tax consequences so get this checked before doing so.

Financial institutions, when looking at a loan application in the trust name or an individually named borrower, will also review this section of the trust and would normally require any named initial beneficiaries to be part of a loan application. Related parties to the initial beneficiaries are not normally party to the trust and as such are not normally part of the above review unless they have actually received distributions. The trust deed provides that the beneficiaries include such persons as are related to you as follows and as such there is no need to specifically identify them.

Note also that beneficiaries include companies and trusts associated with all the persons specifically identified

Appointor

The Appointor (sometimes called the Principal or Guardian) has, in fact, the most powerful role in a trust and should be carefully selected. While the trustee is the one who decides what happens to the assets, funds and profits of the trust, it is the Appointor who has the power to change the trustee and appoint a new one. It is important to consult with your solicitor and include in your will the transfer of this role upon your death and that this power is passed on to the person of your choosing.

Settlor

The Settlor should never be the beneficiary of the Trust to avoid income tax issues for the trustee. The Settlor is someone who puts down a sum of money to start the trust, commonly around $10. Once the trust is established, the Settlor has no other role, entitlements, rights or connection to the trust. This $10 is a gift to commence (settle) the trust. It takes on the literal meaning of a gift i.e. you cannot give it yourself and the giver must not get back anything in return. Therefore the settlor can never be a beneficiary of the trust. We would normally see a friend gift you the funds. The settlor will need to sign the trust deed when you get it, to confirm the gift, after which they have no involvement.

Discretionary/Family Trusts: Advantages

Asset Protection

Many business owners face a degree of risk in owning a business, for example if the business fails, they may be sued personally or put at risk of bankruptcy. Similarly, those in partnerships, particularly those with bank debts, can face similar risks. Assets that are within a family trust are protected from creditors, so even if a claim is made against you, the assets are not in your name and therefore cannot be accessed in these circumstances.

Tax Advantages

Operating your business from a family trust and having the company act as trustee means you can retain the limited liability benefits of a company structure while taking advantage of the tax flexibility benefits of a family trust.

When set up correctly, there are clear family trust tax benefits for individuals and businesses. Because the trust itself does not pay tax, beneficiaries are taxed based on the amount of income placed in their name (as well as any other income they may have from other sources). A family trust allows you to distribute profit amongst family members to utilise their income tax “tax-free thresholds”. If the business’ profits grow too large to distribute effectively, a family trust can also distribute to a separate company to cap the tax rate at 30 percent.

Keeping it in the Family

Whether you’re looking to keep your family home in the family or want to stagger inheritance distribution to ensure it’s not all spent at once, a family trust prevents, will contests and secures assets. Assets held within the trust do not form part of a deceased estate preventing contests to a Will or your child’s spouse claiming their share of an inheritance.

A family trust can provide long-term financial support for your children or grandchildren, allowing you to invest in their long-term education and distribute family assets to future generations. A family trust can also be a great way to protect vulnerable beneficiaries who may make poor spending decisions if they were to control their own assets.

Family/ Discretionary Trusts: Disadvantages

Any income earned by the trust that is not distributed is taxed at the highest marginal tax rate. If you do find you are making a lot of profit as a family trust, those profits must be pushed out to beneficiaries. You could run out of beneficiaries and those beneficiaries will be paying highest tax rate. With a family trust, you can add additional beneficiaries if the trust deed allows for it, but care must be taken as capital gains tax and stamp duty may be triggered if done incorrectly. The trust cannot allocate tax losses to beneficiaries either.

Family Matters

There can be challenges in running the trust when other family issues occur. There can also be some complexities regarding succession planning and asset allocation upon the death of the trustee. With a Will, you can dictate what goes to who, however, a family trust is separate to an individual’s will and you may be able to choose who controls the trust, you don’t dictate how they control it.

Negative Gearing

One of the disadvantages of a discretionary trust is the loss of some benefits associated with negative gearing investments through the trust. Namely, if a discretionary trust acquires a property and borrows to invest in that property, then any losses generated are accumulated in the trust and cannot be distributed to the beneficiaries.

This is not such a problem if the discretionary trust itself other sources of income has but can give rise to significant problems for, say, PAYG-type taxpayers who wish to acquire a property and negatively gear at the same time.

Obviously, the advantages of having the property owned by a discretionary trust may be outweighed in this case by the disadvantage of any negative gearing being generated in the trust itself. The development of a unit trust (one where the discretionary nature is preserved in the trust deed but allows the issue of units) is an attempt to overcome this negative gearing problem.

Family Trust vs Company

One of the key differences between a trustee company and a trading company, is that the trustee company doesn’t trade, it doesn’t have its own tax file number and it doesn’t lodge a tax return of its own. It simply makes decisions for and on behalf of the family trust.

Some other important distinctions are:

Companies cannot access the 50% capital gains discount, whereas a family trust can. Small business capital gains tax discounts can be accessed by both
A company is paying tax at 30% or 25% and pays tax from the first dollar. However, a family trust doesn’t pay tax and profits are pushed out each year
A company can accumulate profits and reinvest those profits into the business as working capital
Companies are great for doing business with unrelated parties and you will be protected by the Corporations Act. As for a trust, if a party is not within family group, you cannot bring them into the trust with you

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Frequently Asked Questions

Best Asset Protection Strategies for Small Business Owners

Advantages and Disadvantages of Testamentary Trusts

Capital Gains Tax Consequences of Separation and Divorce

Why Asset Protection Is Essential for First Home Buyers and Property Investors

Divorce, you, and your business

What is a Trust