Trust in trusts to protect assets

TRUSTS are being touted as the key vehicle to protect family business assets. Finlaysons tax and revenue partner Michael Butler (pictured) says trusts offer major non-tax benefits.

Butler, who canvassed the issues at a recent Family Business Australia forum, says trusts can affect the value of property in a divorce settlement if that property is shared among beneficiaries and also protect values for members with disabilities or dependencies.

‘‘ A worst-case scenario will arise if a family does not plan ahead,’’ he says.

‘‘ For example, the business might be subject to future claims from creditors, exspouses and/or the ATO and, in such as case, all the hard work that has gone into building up a business may come to nothing.’’

Paxton-Hall director Paul Paxton-Hall says a combination of structures often provides the best form of protection and return.

‘‘ Given marginal tax rates and the franking imputation system we have in Australia, the most effective structure for family businesses these days is usually a trading company, shares in which are held by one or more family trusts (with or without a corporate trustee),’’ he says.

Trusts also allow for splitting of different income, an arrangement that would allow a couple to make $4 million of capital gains on a tax-free basis.

But Division 7A can cause difficulties. It was set up to cover situations where business owners could transfer funds from the business to them- selves as a loan or advance – and, in never paying it back, receive tax-free income.

Butler says a crackdown by the Australian Taxation Office now makes this practice an area of interest.

‘‘ The ATO has issued a number of rulings in recent years that apply where trusts make distributions to corporate beneficiaries, in order to take advantage of the 30 per cent company tax rate, where the distributions are left unpaid and owing to the beneficiaries,’’ he says.

‘‘ These are sometimes called ‘ unpaid present entitlements’ or UPEs. Unless structured properly, such arrangements can, in certain cases, give rise to deemed dividends.’’

Paxton-Hall says specialist advice is needed to balance the competing demands of ownership and control.

‘‘ Traditionally people have used companies and trusts to avoid ownership in a person’s name but that strategy is not fool-proof because of the wide scope that laws such as the Bankruptcy Act and the Family Law Act now have,’’ he says.

‘‘ The Government last week urged the tax office to investigate potential.’’