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Hi, Mark Rogerson here from Rogerson Kenny Business Accountants. A common question from our clients is: What is the difference between a company and a family trust? Well, today we’re going to have a bit of a look at it.
So I’ve drawn on the whiteboard here a company and a family trust, what I think they look like. You can see a company has its name – it may be a super proprietary limited and the two key parts of a company is you’ve got a director and you’ve got shareholders. This particular company we would deem a trading company, and what that does is it has its own tax file number, its own ABN. It’s registered for GST. It has its own bank account, etc., etc.
Over here we’ve got a family trust. So with a family trust you need to have a trustee. So that can be either individual people or a company. We always prefer a company. So I’ve drawn here a company, which we would call the trustee company, which acts for and on behalf of the family trust down here.
The key difference between a trustee company and a trading company is that it doesn’t trade. So it doesn’t have its own tax file number. It doesn’t lodge a tax return on its own right. It simply makes decisions for and on behalf of the family trust down here.
So the key components of a family trust are: you’ve got your trustee up here, which has directors and shareholders, and that acts as trustee for the family trust down at the bottom, which has a settlor, you have an appointor, which is a person who has the power to add and remove the trustee, which is a very important role, and then you have beneficiaries down at the bottom here.Mark Rogerson from Rogerson Kenny Business Accountants talks about choosing the right business structure
Just to have a look at how this operates as well, the family trust has one tax file number, one ABN, and it lodges one tax return, whereas the company does all that on its own. This has the non-trading company, which is the trustee company, and the family trust. But in the eyes of the tax office these here are seen as one and the same.
A company is a taxpayer at $0.30 on the dollar. What that means is it pays tax straight to the tax office on its profits, and that’s from $1, all the way up to an unlimited amount, whereas a family trust isn’t a taxpayer, so it doesn’t pay tax to the tax office. The profits in a family trust are pushed out to the beneficiaries each year, and a family trust therefore can’t accumulate its profits, where a company can accumulate its profits and be reinvested in the business as working capital.
Both structures allow for the retaining of losses, so that means the losses can accumulate each year. For example, if you make a loss in either of the entities in year one and year two you make a profit, those profits in year two can be offset against the losses in year one.
You may be aware of the 50% capital gains tax discount. A company can’t access it, where a family trust can. That’s a really important feature of a family trust.
Further, you may also be aware of the small business capital gains tax discounts. Both companies can access that, so they’re equal in terms of that.
If you’re looking to do business with an unrelated party, either now or in the future, a company is a really fantastic option for that, because you’re allowed to go into business with unrelated parties and you also get the protection of the Corporations Act. Conversely, with a family trust, if that party isn’t within your family group, as defined in the trust deed of the family trust, then you can’t bring them in to do business with you in that family trust. So that’s a really big benefit of a company over a family trust.
The asset protection of both entities is really good. Providing you have a company as trustee for the family trust, the asset protection is quite similar in both entities.
If you have very high profits in a company, those profits get taxed at a maximum of $0.30 on the dollar, whereas if you have very high profits in a family trust, those profits have to get pushed out to the beneficiaries, and you can find yourself running out of beneficiaries quickly and those beneficiaries paying top marginal tax rates. So a real consideration between a company and a family trust is not what the profits are going to be in year 1 or year 2, but what they may be in year 10 or year 15.
When it does come time to select what type of structure you’re going to operate your business in, you need to give really careful thought. This here is only a very basic look at it. No one person has the same circumstance, so it’s not a one size fits all. You really need to sit down with an accountant and go through your personal circumstances and your business. It’s very, very difficult and costly to transfer from a family trust to a company or vice versa, or indeed many other entities, because you have the potential for capital gains tax, the potential for stamp duty. It’s really treated as a sale from one to another.
So this here is just a very basic look at some of the key differences between a company and a family trust. Please give me a call if you’d like to talk about the appropriate structure to operate your business in.