Rachel has an entrepreneurial spirit and is eager to start her own business. While she’s excited about the opportunities and growth her venture could bring, Rachel is also thinking ahead. She wants to ensure that if she decides to sell her business in the future, she can take full advantage of capital gains tax (CGT) concessions to maximise her profits. To achieve this, Rachel can establish a discretionary trust to operate her business. In this blog, we’ll explore how using a discretionary trust can provide significant CGT advantages, compared to operating as a company, and offer flexibility in managing the proceeds from a future sale.

The Challenge: Planning for Capital Gains Tax on a Future Sale

Starting a business is an exciting venture, but it’s crucial to think about long-term tax implications, especially if there’s a potential sale in the future. Rachel wants to structure her business in a way that maximises CGT concessions, ensuring she retains as much of the sale proceeds as possible. She has two main options for structuring her business: using a discretionary trust or a company. Understanding the CGT implications of each structure is essential for making an informed decision.

• CGT Concessions:
  When selling a business, capital gains tax can significantly impact the amount of profit that Rachel takes home. The CGT concessions available can make a substantial difference in the final outcome of the sale.
• Flexibility in Distributing Profits:
  Rachel also wants flexibility in how the profits from the sale are distributed. She may want to distribute proceeds among different family members to take advantage of lower tax brackets and manage the overall tax burden effectively.

The Solution: Operating the Business Through a Discretionary Trust

To achieve these goals, Rachel can set up a discretionary trust to operate her business. This structure offers several key advantages, particularly when it comes to planning for a future sale. Here’s how a discretionary trust can benefit Rachel:

1. Access to the 50% CGT Discount:
   One of the significant advantages of using a discretionary trust is the access to the 50% CGT discount. When a business asset is sold, a discretionary trust that meets the eligibility requirements can reduce the capital gain by 50%. This discount is available to individuals and trusts, but not to companies. If Rachel operates her business through a trust, she could potentially halve the capital gain, significantly reducing her tax liability. This means that more of the sale proceeds stay with Rachel and her beneficiaries.
2. Flexibility in Distributing Sale Proceeds:
   A discretionary trust provides Rachel with the flexibility to distribute the profits from the sale among different beneficiaries. The trustee has the discretion to decide how much of the capital gain is distributed to each beneficiary. By distributing the profits to beneficiaries in lower tax brackets, Rachel can minimise the overall tax burden. This flexibility is particularly beneficial for family-owned businesses, where income can be distributed to family members strategically.
3. Planning for Family Wealth:
   In addition to tax efficiency, operating through a discretionary trust allows Rachel to plan for the future and manage family wealth. The trust structure enables Rachel to allocate profits in a way that supports her family’s financial goals, whether it’s saving for her children’s education, supporting elderly relatives, or investing in new ventures.
4. Comparison to Company Structure:
   If Rachel were to operate her business through a company, the situation would be different. Companies do not have access to the 50% CGT discount. When a company sells a business, the entire capital gain is subject to tax, with no discount available. This results in a higher tax liability, reducing the net proceeds from the sale. While companies have their advantages, such as limited liability, they do not provide the same CGT benefits as a discretionary trust when planning for a future sale.

Key Considerations: Setting Up a Discretionary Trust for CGT Planning

While a discretionary trust offers significant CGT advantages, Rachel should consider the following to ensure the trust is set up and managed effectively:

• Eligibility Requirements for CGT Discount:
  To access the 50% CGT discount, the trust must meet certain eligibility requirements. These include holding the business asset for at least 12 months and satisfying the conditions set out by the Australian Taxation Office (ATO). Rachel should work with a tax advisor to ensure that her business meets these requirements and is positioned to take full advantage of the discount.
• Legal and Tax Advice:
  Establishing a discretionary trust involves navigating legal and tax complexities. Rachel should consult with legal and financial professionals to ensure the trust is structured correctly, complies with all relevant regulations, and aligns with her long-term objectives.
• Trust Deed Drafting:
  The trust deed is a critical document that outlines the rules of the trust, including how and when income and capital gains can be distributed. Careful drafting ensures that the trust operates in the best interests of Rachel and her beneficiaries.

The Benefits: Maximising Sale Proceeds and Managing Family Wealth

Using a discretionary trust offers Rachel several significant benefits:

• Tax Efficiency: By accessing the 50% CGT discount, Rachel can reduce her tax liability, ensuring that more of the sale proceeds are retained.
• Flexibility and Control: The discretionary trust provides flexibility in distributing profits, allowing Rachel to manage the overall tax burden and support her family’s financial goals.
• Long-Term Wealth Planning: Operating through a trust enables Rachel to plan for the future, ensuring that her business success translates into financial security for her family.

Conclusion: Strategic Business Planning with Discretionary Trusts

For entrepreneurs like Rachel, planning for a future sale is as important as building the business itself. By operating her business through a discretionary trust, Rachel can maximise her access to CGT concessions, reduce her tax liability, and ensure that the profits from a future sale are distributed in the most tax-effective way. This strategy not only provides tax benefits but also offers flexibility and control over how family wealth is managed.

If you’re considering starting a business and want to plan for a future sale, consulting with legal and financial professionals about setting up a discretionary trust can provide the guidance you need. With the right planning, you can maximise the benefits of your hard work and secure a prosperous future for you and your family.