I'm looking to start a new company with two others. Our new accountant recommended that we use a unit trust as the business entity. The reasons being is that we have varied business billing amounts, frequency and scenarios so we will operating and managing cost centres within the company. The idea is that the unit trust is a distribution mechanism and we are operating like individual businesses within. Tax implications? Is this a weird business structure?

Hey Terence,

There are many ways to run the business.

A Unit Trust means you will have a specific number of units. The year end profit will be distributed according to the number of units you hold. So if one part of the business is making more than the other, then the profits may not be split according to the effort. Keep that in mind as you may need to pay different levels of wages.

A Trust will require a Trustee. I would suggest using a company as a Trustee commonly called a corporate trustee.

From a tax perspective, you are taxed personally on what you receive from the trust. Good to know is a trust cannot distribute a loss but can roll it over BUT if the TRUST does not pay out the profits then they could be taxed at the top marginal tax rate. So if you want to retain some money in the business you have to pull it out pay tax and reinvest it.

OK sometimes the units are placed in your kids or spouses' name or someone in a lower tax bracket to reduce tax.

However, a fixed unit that does not allow any flexibility like a discretionary trust. There are limits

Another way is to have a company and then they have a discretionary trust as the owner. You have one trust your business partner has another.

Company makes money pays 27.5% tax and then you keep the money in the business for use or pay it to yourself down the track as a Franked Dividend.

So you can also have a partnership.

There are issues around control, liability and asset protection on all these things and also Capital Gains Tax.

Go and grab a second opinion or ask the accountants the pros and cons and get them to put together a table.

Hope that helped.

AJ

Hi Terence,
Without knowing exactly what your budgeted income and expenditure/cashflow is it may be difficult to land on the most appropriate structure.
You might like to consider a partnership of your various entities, companies or trusts or combinations.
This will allow to share income and losses and not have losses "locked up" if they occur, or arise from timing of expenses and income (all subject to tax consideration).
Good luck with the ventures.
Regards,
David.

Hi Terrance

I couldn't comment on the tax implications. However from a business banking perspective this seems like a sound structure if each partner is operating as separate cost centres.

I think it's important for the partners to understand and agree among themselves how income is going to be treated to ensure everyone is happy. As the profits/equity of the unit trust are shared according to percentage of unit holding. If a partner with a 10% holding is generating 80% of the income, I doubt they would be happy with only 10% of the return. So I echo much of the same points the accounting professionals above have identified.

If the enterprise needed to raise funds in the future the structure wouldn't cause any real problems. Only requires a little more experience and understanding of the structure and flow of profits.

Cheers

Casey