For many years, trust structures have been an important part of the Australian tax and financial system, providing asset protection and flexibility in how income is shared. However, recent rule changes and the increased complexity of managing trusts have made them less attractive, leading some businesses and investors to rethink their use.
Is There a Move Away from Trusts?
In recent years, there has been a noticeable trend of businesses shifting from trust structures to corporate entities. This transition is due to increased scrutiny of trust arrangements and the complexities involved in managing them, especially with regard to documentation and compliance. Trustees and directors of trustee companies are finding that more time and resources are required to keep up with the latest and complex regulations.
A significant challenge when using trusts for business purposes is the pressure to make timely and accurate decisions. Trustees often need to decide on distributions before the end of the financial year to avoid penalty tax rates on trust profits. This can be tricky, especially when complete financial data isn’t available in time, especially for actively trading businesses. Such timing issues can prevent effective decision-making, ultimately impacting the ability to optimise tax outcomes.
Additionally, the ATO has increased its focus on trust arrangements, especially regarding the integrity rules that have long been part of the tax system, though they haven’t always been rigorously enforced. With the risk of errors and scrutiny higher than ever, businesses are increasingly cautious about their trust structures.
With the right support, trusts can still provide benefits that other structures can’t offer. They can still be an effective platform for passive investment activities, estate planning and as part of a business structure. However, it’s vital to get advice before setting up a trust to ensure it is the right option and to completely understand the merits, demerits, and practical issues that must be managed when using a trust structure.