Understanding the Differences Between Company and Trust Structures in Australia: Tax Consequences Explained

Introduction to Company and Trust Structures

Choosing the right business structure is one of the most critical decisions for any entrepreneur. Two popular options in Australia are companies and trusts. Each comes with unique benefits and drawbacks, so understanding their differences is essential before making a decision.

What’s the Difference Between a Company and a Trust?

• Company: A company is a separate legal entity under the Corporations Act 2001. It can own assets, enter contracts, and incur debts in its own name. Shareholders own the company through shares, and the company can exist indefinitely.

• Trust: A trust is a legal arrangement where a trustee holds assets on behalf of beneficiaries according to a trust deed. Trusts have a maximum lifespan of 80 years and are often used for asset protection and tax planning.

Advantages of a Company Structure

• Limited Liability: Shareholders’ personal assets are generally protected if the company faces financial trouble.

• Tax Benefits: Companies pay tax at a flat rate (currently 25% for small businesses), which can be lower than individual marginal tax rates.

• Profit Retention: Companies can retain profits for reinvestment without immediate distribution.

• Investor Friendly: Easier to raise capital as investors and banks prefer dealing with companies.

• Perpetual Existence: Unlike trusts, companies don’t have a time limit.

Disadvantages of a Company Structure

• No 50% CGT Discount: Companies cannot access the 50% capital gains tax discount available to individuals and trusts.

• Higher Compliance Costs: ASIC fees, reporting obligations, and director responsibilities increase complexity.

• Less Privacy: Company details are publicly available.

Advantages of a Trust Structure

• Tax Flexibility: Income can be distributed among beneficiaries to minimise tax.

• Capital Gains Discount: Trusts can access the 50% CGT discount for assets held over 12 months.

• Asset Protection: Beneficiaries don’t own trust assets, reducing exposure to personal creditors.

• Privacy: Trusts generally operate with more confidentiality than companies.

Disadvantages of a Trust Structure

• Mandatory Distributions: Profits must be distributed annually, or the trustee pays tax at the highest marginal rate.

• Complex Setup and Maintenance: Establishing and amending a trust can be costly and complicated.

• Limited Lifespan: Trusts can only last up to 80 years.

• Funding Challenges: Investors prefer companies due to clearer ownership rights.

Which One Should You Choose?

Your decision should consider:

• Tax Planning Needs

• Asset Protection Goals

• Growth and Investment Plans

• Complexity and Cost Tolerance

For many businesses, a hybrid approach works best—using a company as a trustee for a discretionary trust. This structure combines the tax flexibility of a trust with the limited liability of a company.

The information shown on this website is general information only, it does not constitute any recommendation or advice and as such it has been prepared without taking into account your financial situation, specific needs or objectives