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Partnership of Trusts

A partnership of discretionary trusts is simply a partnership in which each partner is the trustee of a discretionary trust, that is, each discretionary trust is the partner.

A partnership of discretionary trust is more complex than a normal partnership of individuals, so it may be wise to appoint an agent or corporate manager. An agent or manager will act on your behalf for administrative purposes, such as entering into contracts on behalf of the partnership of discretionary trusts.

Advantages
Disadvantages
Other Tax Issues

Advantages

  1. Although each partner is still jointly and severally liable for the partnership’s debts, the trustee’s personal assets are generally protected. This is an important advantage when compared to a general partnership of individuals.
  2. Each principal has a fixed interest in the capital and income of the partnership. This occurs through their discretionary trust.
  3. It is also easier to make tax-free distributions through a partnership of discretionary trusts, when compared to unit trusts and companies. It may also be easier to access the concessional CGT treatment (provided by the small business tax concession).
  4. Each partner is independent of the other.
  5. The Individual principals can be employed by the partnership of discretionary trusts, which will make them eligible for benefits such as superannuation. This would not be possible under a partnership of individuals.

Disadvantages

  1. This structure is far more complex than a partnership of individuals, and could be more expensive to set up and operate.
  2. Some external parties may find it hard to understand how the partnership is operated.

Other Tax Issues

Tax File Number: A trust must have its own tax file number and uses it when lodging its annual income tax return. The trustee needs to apply for a tax file number in its capacity as trustee of the trust. A tax file number can be applied for on the ABN application form.

ABN: If there is no agent, the partnership should obtain an ABN and register for GST. If there is an agent, partners need to decide whether the agent should also obtain an ABN and register for GST. This would cause external parties to deal with the agent rather than inquiring about the structure behind the agent.

Who pays Income Tax: Whether or not a trust has a tax liability depends on the type of trust, the wording of its trust deed and whether the income earned by the trust is distributed (in whole or in part) to its beneficiaries. Where the whole of the net trust income is distributed to adult resident beneficiaries, the trust will have no liability. Where all or part of the net trust income is distributed to either non-residents or minors, the trustee will be assessed on that share on behalf of the beneficiary. In this case, the beneficiary is required to declare that share of net trust income on their individual income tax return, and also claim a credit for the amount of tax liability paid on their behalf by the trustee. Where the net trust income is accumulated by the trust, the trustee will be assessed on that accumulated income at the highest individual marginal rate.

If a trust is carrying on a business, each year all income earned by the trust and deductions claimed for expenses incurred in carrying on that business must be shown on a trust tax return. The Tax return also shows the amount of income distributed to each beneficiary.

Trusts are not liable to pay PAYG instalments. Instead, the beneficiaries or trustees may be liable to pay instalments.

GST: If the trust is carrying on an enterprise, the entity that is trustee can register for GST in its capacity as trustee of the trust. This can be applied for on the ABN application form. A trust is required to be registered for GST if its annual turnover is $75,000 or more ($50,000 or more prior to 1 July 2007). The registration threshold for non-profit organisations is $150,000 ($100,000 prior to 1 July 2007).

Superannuation: Trusts may need to pay superannuation contributions for trustees if they are also employed by the trust. A trust also needs to pay superannuation contributions for other employees of the trust.

Splitting Profit: It is important to make sure that the partnership agreement sets out how partnership capital is treated and accounted for throughout the partnership. The partnership agreement should also cover how profit will be split. Only general law partnerships deriving income are able to split profits in different proportions to the partner’s underlying interest in the partnership. Individuals who have jointly invested in shares or jointly own property will be liable for tax on their share of profits, based on their respective ownership interest in the asset.

New and Retiring Partners: When a new partner is added or an existing partner retires, the current partnership ceases and a new one is created. The ATO does not always require the new partnership to register for a new Tax File Number or ABN. This will depend upon your business circumstances. It is wise to seek professional accounting advice if you are unsure of how a change in your partnership may affect your ATO tax obligations.

Changing the Partnership Agreement: Partnership agreements can be changed if all partners involved sign the document once changes have been made. Generally speaking, unless partner interest in the partnership changes, no adverse tax consequences will occur.

Our dedicated team can assist you on how to set your business up as a trust. Complete and submit an express enquiry form or call us on 1300 QUINNS (1300 784 667) or on +61 2 9223 9166 to arrange an appointment.

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The Quinn Group operates Quinn Consultants, Quinn Lawyers, Quinn Financial Planning and Quinn Financial Solutions. The Quinn Group provides related information in regard to legal, accounting and financial planning issues. Liability limited by a scheme approved under Professional Standards Legislation* *other than for the acts or omissions of financial services licensees.