Since 1999, the 50% discount concession for capital gains has often made choosing a trust as the preferred entity a compelling one for Australian taxpayers. In fact, a trust has been a fundamental part of a group structure for decades.

However, recent factors such as the proposed Division 7A reforms, changing law interpretations for trusts, lower company tax rates for small business entities, historic low interest rates and inflation constantly falling short of targets amidst flagging productivity, mean that it’s high time we took another look at the trust v company question.

With the 2021 Noosa Tax Intensive quickly approaching, we caught up with presenter Brian Richards, to chat about his session, Use of Companies v Trusts in the current environment.

The session will delve into the choice of structure and the changing influences practitioners need to be cognizant of. So as we emerge from the greatest recession in a century, Brian rhetorically muses whether it is time that we reconsidered our structural thinking? Brian gave us a sneak peak into his thinking around the current and future landscape.

Influences shaping client decisions

“For most small businesses the choice has traditionally been between the use of a trust, be it a discretionary trust or a unit trust, and alternatively a company,” Brian explained.

“The choice of structures Is germane to a private business client. What structure that a client chooses, be it a trust or a company, is determined by a number of commercial and taxation issues. In the past the flexibility of a trust combined with the CGT general discount were strong influencers. However, Brian suggests that it is time to reflect on all of the taxation and commercial changes, both past and pending, and to consider, what is presently the best choice of structure.”

In his session, Brian will look at the influences that, over the past few decades, that arguably have prompted a change of attitude, change of process and change of choice for private business and investment clients choosing between trusts and companies. Alongside this changing environment, Brian will explore potential future influences, in particular the recent recommendations by Treasury and the Board of Taxation in relation to Division 7A and Division 152.

“From my own point of view, and noting these matters are conditioned by different perceptions of the relevance of influencing factors but, in my opinion the greatest practical change that has occurred has been the changes with the interpretation and application of the trust provisions. They have been, if you like, shifting sands over a number of years,” Brian said.

Where there were previously benefits to using a discretionary trust, for example, where asset protection measures are important, these objectives need to be balanced by changing policies of laws – bankruptcy, family law and corporate law, Brian explained. Recent years have seen a number of court cases and rulings seeking to restrict the benefits of discretionary trusts.

“I have a strong view that a good taxation system requires a high degree of certainty about not only what the law is but also how the law will be interpreted by the Courts and in particular the Australian Taxation Office. Presently, there has been and continues to be uncertainty with the taxation of trusts, not only in the present environment, but also going forward about what is going to be the law at relevant times for a client. In that regard, the taxation of a company has a greater degree of certainty,” Brian said.

“The relevant issue an advisor needs to consider when providing advice to a client in relation to the choice of structure, is not only about the immediate tax implications, but more particularly the application of the taxation during the ‘life’ of a business or investment. In that regard having some certainty that the present interpretation of the taxation laws will be consistently applied to future transactions (save changes in Government policy) is critical. That being the case, using a business structure that has less certainty is problematical.”

The future of companies v trusts

Although accountants don’t have a crystal ball and can’t be expected to predict the future for their clients, Brian said that anticipating future client needs and objectives is key to providing advices in relation to the choice between a company and a trust.

“We need to take account of the various objectives of the client, be it asset protection, succession planning, growth, and funding - all the particular factors from a commercial perspective feed into the choice of entity,” Brian said.

“What are the points of influence here, that have continued to be relevant today? Knowing and having responsibility to ensure that the recommendation you make to the client is appropriate, not only for now, but for future I think is a fundamental aspect.”

According to Brian, who has been in accounting since 1968, the fundamental issues small business clients deal with today are largely no different to what they face today.

“There is enormous risk associated with carrying on small business. We're all very privy to the fact that the statistics of small business failure are high in even normal circumstances, let alone the situation of COVID. My particular interest has been to observe and experience the shift in the law as it would apply to what is normally regarded as fairly common structuring arrangements,” he said.

Speaking for small business

“I have a belief that, whereas it is generally “acknowledged” that private business in Australia is a very important contributor to our economy, I have a very strong opinion that the private business taxation interests are not properly represented at government levels or by our statutory authorities,” Brian said.

“That being my opinion, there needs to be a voice that focuses on many private business issues, including taxation, whose role is to be an advocate for small business in relation to the creation of taxation policies and/or how changes that are made by legislation or administrators have an impact on the economies of our small business clients.”

And what better place to begin a conversation around the needs, goals and strategies for private business clients than an Institute event?

“The great advantage at the Taxation Institute's forums is that they provide an environment where practitioners at all levels can get together and discuss practical private business taxation issues. Certainly, the plenary sessions create the intellectual stimulus to commence a conversation, and balance of the forum allows for the discussion and debate of the thoughts of the plenary speakers. Brian said.

“We are all commonly linked because of our interest in tax, however importantly the opportunity to have a conversation with other practitioners about their issues or to be able to make a contribution to a discussion about those matters that have a real impact on the application of our taxation environment is very much the essence and advantage for the Taxation Institute’s Noosa Tax Intensive.”

Join Brian and our lineup of expert speakers at the 2021 Noosa Tax Intensive from 18 - 19 November 2021, by attending in-person, or tuning in virtually. Find out more.

About Brian

Brian Richards, CTA, of Richards Advisory has specialised in providing taxation advices to accounting and legal practitioners in respect of a wide range of business clients for in excess 40 years. His particular taxation specialty areas include business restructuring, intellectual property transactions, CGT issues and tax planning matters. As a taxation specialist, Brian has extensive academic and other lecturing experience.