Using a Family Trust in Your Business Structure

Relevant For:

SME business owners and family-owned businesses.

Key Points:

• Family trusts provide flexibility, asset protection and succession benefits.
• They allow income and capital allocation to family members, maximising tax efficiencies.
• Trusts can protect business assets from individual claims.
• Trusts facilitate easy succession planning without triggering taxing events.
• CGT concessions can be accessed, offering significant tax-free benefits on business sales.
• Restructuring to include a trust can be done without significant tax implications using CGT rollovers and concessions.
• Ensure restructures have commercial motivations to avoid ATO anti-avoidance rules.

Full Article:

Family trusts are a highly flexible and often underutilised tool in business structures. While many consider using trusts for holding investment assets, it’s important to remember that for a smal-medium business owner, the business itself is often the family’s most significant investment. Proper structuring of this investment is crucial.

Many of Australia’s wealthiest individuals use family trusts to hold their business shares. While smaller businesses may not have the same scale, the principles remain just as relevant, especially for family-owned businesses.

Ideal Structure

A typical structure for a family-owned business involves a company that runs the business, with all shares owned by a family trust. If there are multiple owners, each owner’s share would be held by their respective family trust.

For larger businesses or those with multiple activities or divisions, an effective structure is where operating companies are owned by a holding company (Holdco), with 100% of Holdco’s shares held by a family trust.

If the family owns the premises from which the business operates, a common strategy is to have the family trust hold the business premises and lease them to the operating company at market rent.

Advantages

1. Flexibility: Trustees can allocate income and capital to any family members or related entities in any proportion each year. This can include different percentages of various income types to different individuals, maximising tax efficiencies.
2. Asset Protection: Since family members do not personally own the trust assets, business assets are generally protected from individual claims, although not always (e.g., family law disputes).
3. Succession: Control of a family trust can be passed to the next generation easily by changing the trustee or the shareholders and directors of a trustee company, avoiding taxing events or complications.
4. Capital Gains Tax (CGT) Concessions: Family trusts offer significant planning opportunities for accessing generous CGT concessions on the sale of a small business, aiding in maximising tax-free benefits.

Restructuring to Use a Trust

If your business started with a company with individual shareholders, you might restructure to use a trust without significant tax implications.

One method is to use available CGT rollovers and concessions to avoid triggering a taxing event.

Another approach involves individuals transferring their shares in the operating company to a new holding company owned by a family trust. This method unlocks value built up in the business, allowing individuals to receive proceeds from the holding company equal to the current value of the transferred shares.

If cash isn’t immediately available or needed, the individual can have a loan account drawn down in future years.

Ensure that any restructure is motivated by commercial considerations, not solely for tax benefits, as the ATO can apply anti-avoidance rules. Fully document all planning and deliberations to support the commercial rationale.