Business Entities – Discretionary Trust
A discretionary trust is a very common vehicle for use by families, for business operation.
Every discretionary trust needs the following:
- Settlor – the person who establishes the trust and signs the trust documents.
The settlor should never be a beneficiary under the trust. - Trustee – can be a company or, at least, two individuals.
The trustees are responsible for all day-to-day activities of the trust. - Trust Deed – sets out:
- the objects of the trust;
- what the trust can do;
- investment powers;
- borrowing powers; and
- the names of the settlor, beneficiaries, trustee and appointor.
- Beneficiaries – beneficiaries can be divided into a number of groups:
- Primary beneficiaries
- Secondary beneficiaries
- Tertiary beneficiaries
A discretionary trust, through the trustees, can conduct a wide range of business activities.
The discretionary trust has to prepare an income tax return for the activities of the trust, and show the distribution of the taxable income of the trust to the beneficiaries.
In a discretionary trust, the trustee utilises its own discretion as to which of the beneficiaries will receive the income of a trust.
The beneficiaries have to include their share of distribution from the discretionary trust in their own income tax return, and pay income on their total taxable income.
In normal circumstances, the discretionary trust does not pay income tax. However, it may have to pay income tax if the trustee has not distributed the taxable income. Tax is paid at a penalty rate of 46.5%.
The flowchart of a discretionary trust is as follows:
Next week, we will comment on operating a small business through a Unit Trust.
We will then comment on companies the following week.
If you would like to discuss business structures, please do not hesitate to contact us.
An Important Message
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