Which structure is best for you? – Partnership of family trusts

In the last of our series on the different structures available to you we look at a combination of 2 structures we have looked at in previous issues. That is, a partnership of Family Trusts.

As you will have noted from the discussion on a partnership structure, one of the main downsides of the structure is the exposure you have if you are an individual partner being jointly and severally liable for all liabilities of the partnership. This exposure can be limited where the partner in the partnership is a family trust (or a company for that matter), as long as the trust has a corporate trustee and no other assets are held in that trust.

The partnership of family trusts can trade under the banner of a nominee company so the business world feels it is dealing with a corporate entity. Beneficially, though, the trading entity is the partnership of family trusts.

Advantages

  • Most CGT small business concessions are easily accessible to each partner (assuming the active asset test and the $6.0M threshold test are passed) even if they don’t own 20% of the partnership.
  • If losses are made in the business then they are not caught in that structure. The losses are distributed to each of the partners (family trusts) who then deal with them under their own circumstances.
  • There are no tax ramifications of taking profits out of the business (as with companies) as the profits are deemed to be received by the partners each year whether drawn or not.
  • There is limitation of liability for the partners as long as a corporate trustee is used  and subject to concerns raised in a recent case where directors of a trustee company were held liable for deficiencies in the trust.
  • Good for partnerships of 2 family groups as income can be split in their partnership proportions and then dealt with by each family trust as they see fit.
  • Allows flexibility of distribution of income within each family including distributing income to beneficiaries in a low marginal tax bracket.
  • Structure allows each partner to make their own individual decision on access to CGT concessions and family trust elections.

Disadvantages

  • An expensive structure to set up as it requires 2 corporate trustees, 2 trusts and a nominee company if used.
  • Not as simple for succession planning as other structures as any change in partners could lead to a brand new partnership with a new ABN and tax return.
  • Banks may not be familiar with the structure so there can be difficulty in borrowing.
  • The family trust must distribute the net income to its beneficiaries so if a corporate beneficiary is not used then tax may be borne at the highest marginal tax bracket.

Summary

The partnership of family trusts is the optimum structure for accessing CGT concessions. It is normally used where 2 or more unrelated parties are going into business together and they want to minimise the amount of capital gains tax that they pay on the expected capital gain. The structure gives access to CGT concessions to business owners who are not controlling individuals of a business.

The structure gives significant flexibility to profit distribution as well as limitation of liability. On the downside succession planning can be a problem and it is a costly structure to set up and run.