Discretionary Trust as a Single Founder Business Model

Overview

A discretionary trust is a moderately complex structure where one person (Trustee) holds property for the benefit of another (Beneficiary). The trustee distributes capital to the beneficiaries according to the terms established in the trust deed. Business starters usually choose to establish trusts for tax reasons. By distributing capital through a trust, individuals can minimize the total amount of tax paid to less than that of a company structure. Furthermore, it is possible to receive a 50% exemption from the government taxes on capital gains from the disposal of assets.

The Settlor

This individual is responsible for establishing the Trust relationship. While the settlor can also be a trustee or beneficiary in the trust if there are other beneficiaries, it is much more common that the settlor exits the trust after its creation.

Trustee

The trustee manages and distributes capital to the beneficiaries. In a discretionary trust, the trustee has discretion over how, and if they are to distribute capital to the beneficiaries. A trust can have multiple trustees and a trustee can be a beneficiary of the trust as long as there are additional beneficiaries to the trustee.

Appointor

A trust can create an appointor to add a trustee to the trust deed or remove one if the need arises. They are often considered the ‘controller’ of the trust because they can remove the trustee.

Beneficiary

A beneficiary is an individual who receives the benefits of a trust. In a discretionary trust, a beneficiary may receive all the benefits of a trust or none, depending on how the trustee distributes the capital within the trust.

How to Establish a Single Founder Discretionary Trust

A trust is established with a trust deed that sets out the identity and rights and responsibilities of the trustee, beneficiaries, settlor and appointor. You can ask Ailira to help you draft a discretionary trust deed, or use a form

Laws pertaining to the business field

Individuals participating in the business will need to follow laws relating to their business field. For example, an electrician carrying on a business will need to be licensed. It is important that before starting any business, the founders are aware of these stipulations to avoid disputes later.

Business name

If the business is being carried on under any name other than that of the full name of its founders, then the name needs to be registered with ASIC. This is a simple and inexpensive process but still required in Australia.

Tax File Number (TFN)

An Australian Tax File Number (TFN) is a personal reference number for taxation purposes. While a TFN is not required for personal use, but the tax fees are substantially higher without one. Furthermore, without a TFN it becomes impossible to obtain an Australian Business Number.

Australian Business Number (ABN)

Every business after July 2000 is required to have an Australian Business Number (ABN), which can be attained through the Australian Taxation Office (ATO). Find an ABN Application form here

Register for Good and Service Tax (GST)

If the business has a GST turnover of $75,000 or more a year in income, the they are required to register their business for GST.

Example Scenario of a Discretionary Trust

Example 1:

Michael is considering a business as a contractor for a construction company. He will work in tandem with his apprentice James, while his wife Sarah works part time to handle the book keeping for the business. In this case, it might be appropriate that Michael arranges his business as a discretionary trust. As Michael has family members that are not working full time and over the age of eighteen, he can act as a trustee and distribute the income from the business to his spouse. This will allow them to minimise their tax thresholds, which will then cost them less in tax fees. The discretionary trust also gives Michael a level of protection in the event that his business incurs debts.

Example 2:

Frank is the owner of a fruit store business which is run within a discretionary trust. Because Frank operates his business within a discretionary trust, he is able to distribute a portion of the store’s income to his two children, who live at home with Frank. This reduces the tax threshold that Frank is subject to and saves him a considerable sum on tax fees each year. Furthermore, the fruit industry in the area where Frank lives is deteriorating. This means that any debts the store incurs while operating in these hard circumstances will remain separate from Frank’s debts.