Accountants in Sydney on Partnering Family Trusts
In our latest instalment exploring various structures, we delve into a powerful combination of two previously discussed options – a partnership of Family Trusts. Discover how this structure, with the assistance of skilled accountants in Sydney, can provide unique advantages for your financial goals.
As you will have noted from the discussion on a partnership structure, one of the main downsides of the structure is the exposure you have if you are an individual partner being jointly and severally liable for all partnership liabilities. This exposure can be limited where the partner in the partnership is a family trust (or a company), as long as the trust has a corporate trustee and no other assets are held in that trust.
The partnership of family trusts can trade under the banner of a nominee company, so the business world feels it is dealing with a corporate entity. Beneficially, though, the trading entity is the partnership of family trusts.
Advantages
- Most CGT small business concessions are accessible to each partner (assuming the active asset test and the $6.0M threshold test are passed) even if they don’t own 20% of the partnership.
- If losses are made in the business, they are not caught in that structure. The losses are distributed to each partner (family trusts), who then deal with them under their own circumstances.
- There are no tax ramifications of taking profits out of business (as with companies) as the profits are deemed to be received by the partners each year, whether drawn or not.
- There is a limitation of liability for the partners as long as a corporate trustee is used and subject to concerns raised in a recent case where directors of a trustee company were held liable for deficiencies in the trust.
- Suitable for partnerships of 2 family groups as income can be split in their partnership proportions and then dealt with by each family trust as they see fit.
- Allows flexibility of income distribution within each family, including distributing income to beneficiaries in a low marginal tax bracket.
- The structure allows each partner to decide on access to CGT concessions and family trust elections.
Disadvantages
- An expensive structure to set up as it requires 2 corporate trustees, 2 trusts and a nominee company if used.
- Not as simple for succession planning as other structures, as any change in partners could lead to a brand new partnership with a new ABN and tax return.
- Banks may not be familiar with the structure, so borrowing can be difficult.
- The family trust must distribute the net income to its beneficiaries, so if a corporate beneficiary is not used, tax may be borne at the highest marginal tax bracket.
Summary
The partnership of family trusts is the optimum structure for accessing CGT concessions. It is commonly used where 2 or more unrelated parties are going into business together and want to minimise the amount of capital gains tax they pay on the expected capital gain. The structure gives access to CGT concessions to business owners who are not controlling individuals of a business.
The structure gives significant flexibility to profit distribution and limitation of liability. On the downside, succession planning can be problematic and costly to set up and run.
If you have any queries in relation to the above, don’t hesitate to reach out and contact us.
*Correct as of October 2014
*Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.
