Advantages and disadvantages of a discretionary family trust as a business structure
The discretionary trust is an extremely flexible business and investment structure.
Attribution is the ability to identify certain classes of income derived by a trust, and allocate portions of these income classes to particular beneficiaries. Attribution enables the trustee to distribute income classes to the beneficiaries who are able to best utilise their characteristics, and thereby achieve the most tax-effective result.
For example, the quarantining of capital and revenue losses means that a capital gain to a beneficiary with a capital loss is more valuable in after tax dollars than to a beneficiary with revenue losses. Although both beneficiaries could utilise their losses to reduce tax on the distributed capital gain, the relative “rarity” of capital gains as compared to revenue gains means there is a value to the preservation of the revenue loss.
As eluded to above, attribution is only possible if it was contemplated in the trust deed, and the various classes of income must be traceable in the accounts of the trust to the ultimate beneficiaries. It is preferable for each class of income to be paid into a separate account, and distributions to beneficiaries to be paid from the appropriate account. This practice has become less popular, and it is generally accepted that detailed accounting records of each class of income is sufficient.
Although the discretionary trust has a number of positive commercial and tax attributes as both an investment and business structure, it is not universally appropriate. In particular:
Partnership Sole-trader Income splitting