Trust vs Company: Choosing the Right Structure for Tax Efficiency

Trust vs Company at a Glance

Key idea: Trusts shine when you can flexibly distribute income and access the CGT discount. Companies shine when you need to retain profits to reinvest at a lower rate.

How Each Structure Is Taxed

Trusts

• Profits are generally distributed to beneficiaries who then pay tax at their own marginal rates.
• Undistributed income is typically taxed to the trustee at the top marginal rate (which is punitive), so timely resolutions matter.
• Trustees can “stream” certain types of income (e.g., capital gains, franked dividends) if the deed allows and resolutions are done correctly.

Companies

• Profits are taxed in the company at 25% (base rate entity) or 30%.
• Paying dividends passes franking credits to shareholders, who then pay top-up tax (if any) at their marginal rate.
• Companies don’t get the 50% CGT discount, but they can hold and reinvest profits efficiently.

CGT Discount, Franking Credits & Retained Profits

• CGT 50% discount: Individuals (and many trusts flowing to individuals) can generally access this for assets held > 12 months. Companies cannot.
• Franking credits: Companies attach franking credits to dividends; trusts can stream franked dividends to beneficiaries if conditions are met.
• Retained profits: Companies are ideal for building retained earnings at a 25%/30% rate. Trusts are less suitable for retaining income due to punitive trustee tax on undistributed amounts.

Division 7A, UPEs & Personal Services Income

• Division 7A (private company loans/benefits): If a trust appoints income to a company and leaves it unpaid (an “unpaid present entitlement” or UPE), Division 7A can deem it a loan unless managed under acceptable terms.
• Loans from companies to shareholders/associates: Must follow compliant loan agreements/repayments to avoid deemed dividends.
• Personal Services Income (PSI): If income is mainly for your personal effort/skill, anti-avoidance rules can limit income splitting via entities. Structure choice won’t override PSI rules.

Losses, Streaming & Family Trust Elections

• Trust losses: Generally stay in the trust and are subject to trust loss rules; they cannot be distributed to beneficiaries.
• Streaming: Many deeds allow streaming of capital gains and franked dividends to specific beneficiaries.
• Family Trust Election (FTE): Useful for managing franking credits and some loss rules, but distributions outside the “family group” can attract penalty tax. Get advice before electing.

Asset Protection & Succession

Both structures can enhance asset protection when used correctly. A discretionary trust with a corporate trustee helps separate operating risk from asset ownership. Companies provide limited liability but operating assets may still be exposed; consider holding valuable IP/plant in a separate entity and leasing/licensing to the trading company.

Setup, Costs & Administration

• Trust: Requires a trust deed, appointor arrangements, annual trustee resolutions, and compliance filings. Corporate trustee recommended.
• Company: ASIC registration/annual statements, company tax return, payroll/STP if you pay wages, Division 7A monitoring where relevant.
• Costs: Companies often cost more to run annually, but can deliver savings where profits are retained or where clear governance is needed.

Practical Examples (with Numbers)

Example 1: Growing Profits, Need to Reinvest

Facts: $250k business profit; owners plan to reinvest 70% for growth.

• Company: Tax at 25% = $62.5k; $187.5k retained to reinvest. Dividends later can pass franking credits.
• Trust: Must distribute most income yearly or risk top-rate trustee tax. Not ideal for retaining profits.

Likely winner: Company (for reinvestment efficiency).

Example 2: Capital Asset Sale (Held > 12 Months)

Facts: $200k capital gain on an asset held over 12 months; owners want to extract proceeds.

• Trust → Individuals: Access to 50% CGT discount via beneficiaries may significantly reduce tax.
• Company: No 50% CGT discount—more tax at the company/shareholder level overall.

Likely winner: Trust (for CGT discount planning).

Example 3: Income-Splitting in a Family Group

Facts: Profits vary between $120k–$220k; spouse has low other income; adult children at different brackets.

• Trust: Can distribute to adult beneficiaries at lower brackets (within rules), optimising group tax.
• Company: Profits taxed in company; dividends later franked—still efficient, but less flexible year-to-year.

Likely winner: Trust (for annual distribution flexibility). Note minors’ unearned income is taxed at higher rates.

Illustrative only: Actual outcomes depend on personal tax brackets, other income, timing, and compliance settings (e.g., deed powers, streaming, Division 7A management).

Decision Checklist

• Will you retain profits for growth (company) or distribute to family members (trust)?
• Are future asset sales likely (trust for CGT discount)?
• Do you need flexible distributions to adult beneficiaries (trust)?
• Is PSI a risk (seek advice—entity won’t override PSI rules)?
• Any Division 7A/UPE exposure (plan carefully if using both a trust and a company)?
• What level of asset protection and governance do you need (company plus corporate trustee options)?

FAQs