How do you create a trust? 

When debating whether to set up a company or trust, one of the things to look at is the methods of withdrawing money. 

For a company, you can withdraw the money through the following:

1. 1. Salary, wages, or director’s fees: The most common method of taking money out of the company is through salary, wages, or director’s fees. In this case, the director is treated as an employee of the company, which makes them entitled to be paid by the company together with their compulsory superannuation. This also means that the company will withhold tax from the director, which will be included as part of the assessable income in the director’s tax return. 
2. 2. Dividends: Dividends are a distribution of the company’s profits to its shareholders, which may include a franking credit (the tax amount already paid by the company that is passed on to the shareholder). This can be received in addition to the salary, wages, director’s fees, or expenses to be reimbursed. This can be paid at different times throughout the year and is not limited to the end of the year. It is necessary for companies to issue a dividend certificate and declare it during a board meeting. The benefit of utilising the dividend options is that they are not subject to superannuation, payroll tax, or worker’s compensation. 
3. 3. Director’s loan: As a director, you can either borrow money from the company or the company can borrow from you.If it is a loan, then there is no need to withhold any taxes as when you receive money as a salary, wages, or director’s fees. The implications depend on the length of the loan and whether the company owes the director or the director owes the company at year-end. When the financial year ends and you’ve figured out that the company owes you money, you can withdraw the money for its repayment. However, if the director owes money to the company, they can either pay the full amount of the loan or write up a loan agreement that details the minimum repayment, interest rate, and length of the loan to avoid Div 7A. You can read our blogpost about Div 7A to know more about its implications. 
4. 4. Fringe benefits and allowances: This could be the usage of company assets for private purposes, membership expenses, or reimbursement of work-related expenses, which include phone, internet, training, travel, and other business expenses. 

With a trust, you can withdraw money through the following methods:

• Income distribution resolution: This is prepared at the end of the financial year to determine which of the trust beneficiaries receives the trust income, especially in a discretionary trust. 
• Loan from the business: The trustee can lend money or assets to beneficiaries and their associates in the form of a loan agreement. The trustee has the discretion to loan a part of the trust income on interest-free terms to another person instead of the beneficiary entitled to the said income to reduce the overall tax payable by the beneficiaries (reimbursement agreement). 
• Repayment of loans made by the business: The repayments of the principal amount may not be tax deductible, but the interest expenses related to the loan can be eligible for a tax deduction. Only the interest income received from the loan should be included as part of your assessable income in your tax return. 

With this information, you can make a better decision on whether to go with a company or start a trust. 

How to create a trust deed? 

Creating a trust can be complicated and confusing if you are not familiar with it or it hasn’t been properly introduced to you. 

What to look out for when starting a trust:

1. Have you specifically identified and notified the beneficiaries of the trust? 
2. Did you include a default beneficiary—a person or group of persons who will receive a share of the trust income in the event that no resolution for the income distribution is made—in the terms of the trust deed? 
3. Have you selected a trustworthy person or entity that will act as your trustee and specifically defined their roles and responsibilities? 
4. Have you specifically defined the source of income and income distribution? 

It is important that terms are properly specified in the trust deed, as the actions of the trustee and beneficiaries should be consistent with the trust deed; otherwise, these actions will be invalid in the eyes of the law and attract legal consequences. 

To prepare a trust resolution for an income distribution, here are some things you might need to consider:

1. *Ensure that you are preparing the resolution within the timeframe written in the trust deed or before 30 June. 
2. *Identify which of the beneficiaries are entitled to the income distribution and which of them are not. 
3. *Specify the amount or percentage each beneficiary is entitled to in the trust income. 

The purpose of a resolution and present entitlements is to present who is legally entitled to the income or capital of the trust among the beneficiaries for the financial year. These resolutions have to be made before 30 June so that the distributed assessable income will be included in the current year’s tax return. 

In a situation where a distribution is made to someone who is not an eligible beneficiary, the resolution becomes ineffective; therefore, they cannot claim the assessable income, and either the trustee or default beneficiary is assessed on that income. 

Consult with us now to get a better illustration of what you need to achieve your goals. We offer both company and trust setups. Click on the button below to register for an appointment now!