Company Vs Trust - Which do I choose

Hello,

My partner and I are looking to buy a retail business. Our accountant has recommended that we set up a Trust with a company as beneficiary, instead of just a company.

He explained the difference but it all went over my head. What is the advantage of a Trust/company over just a company when running a business? I know it has something to do with capital gains tax when we sell the business, but are there any other advantages in the mean-time, such as income tax savings?

Thank you for your help!

 

If you are buying a basic retail business, then possibly apart from plant & equipment, stock/inventory, the business may only have goodwill as a capital asset. It is this item that will be subject to capital gains tax if you achieve growth during your tenure.

The disadvantage of a company owning that asset is that it does not receive the general 50% CGT concession. Trusts and individuals do. A company may be eligible for the Small Business Entity concessions for CGT, but even then it can be hard to get to the funds in a tax effective manner. Hence your accountants recommendation.

You can also buy the asset in your own name(s) but run the business via a company or trust. But before you consider that you need to understand your risks.

 

Thanks Matt,

So if I set up a trust, and make a company as a beneficiary as well as myself, does this mean it wont be taxed any higher than 30%, and when we sell the business in the future we'll get the 50% CGT concession on the goodwill?

 

Hi SydTom,

I guess the whole thing depends on how much the business is going to make. As individuals, you could each receive up to $80,000 each and still be on the 30% tax bracket. Obviously your accountant knows your whole situation. You can also look up Small Business Concessions when selling a business

Cheers,

Dan

PS Before making a taxation decision speak to your registered Accountant or Tax Adviser.

 

Hi Dan,

We're expecting to earn more than $80,000 each per year from the business, so I guess making a company a beneficiary would help keep the taxes down?

If we're both on the 45% bracket for that year, can we still take money from the company at 30%? This company & personal tax system confuses me a bit.

 

Hi SydTom,

You should ask your accountant about putting the business in the family trust, this will allow you to stream income to other family members who may be on a lower tax rate.

If your accountant has suggested a pty ltd setup, you and your business are separate entities for taxation and legal purposes.

When you speak to your accountant again get him to clarify the differences for you again.

Cheers,

Dan

PS Before making a taxation decision speak to your registered Accountant or Tax Adviser.

 

If you do use the company as a bucket company i.e its where excess profits end up, then you need to be careful of Div 7A - speak with your accountant about this. Also, how do you then get the money out of the company. If you are already about to go into the 40% bracket individually, a dividend from the company will certainly push you into it.

As an aside if your taxable income is $100K then your average rate of tax is approx 30% (forgetting HECS and medicare levy surcharge) i.e the company rate. So sometimes all these structures are over the top, on a tax basis, if that's all you'll earn.

The small business CGT concessions are good, but they're not great. It can still be hard to get the money out tax effectively from a company that sells a capital asset. A trust gets the same concessions without the hassles, if a it meets certain tests, and it gets the general CGT discount.