Trading trusts
A trading trust is a trust that carries on a business. A trading trust has a trust deed and:
-
can confer wide powers and discretions on trustees, eg
- the power to carry on a business,and
- the power to hold non-diversified, high-risk investments.
- has wide borrowing and lending powers
- can make provision for a corporate trustee
- can contain an adequate indemnity for trustees.
A trading trust may be used as an alternative to other business structures such as the traditional limited liability company.
How is a trading trust taxed?
| If the trust is a complying trust (formerly qualifying trust) ... | is taxed at ... | and ... |
|---|---|---|
|
income derived by the trustee in an income year and distributed to beneficiaries (either during the income year or within six months of the end of the income year) |
the beneficiaries' marginal tax rates. |
|
|
income that is not distributed in this way |
the trustee rate (currently 33%) |
it can then be distributed to beneficiaries with no further tax payable. |
The trustees of a trading trust can carry forward tax losses, but those losses cannot be passed on to beneficiaries.
Does fringe benefit tax (FBT) apply?
If benefits are provided to a beneficiary who is not an employee of the trust or a person associated with an employee, FBT will not apply as the beneficiary is not receiving the benefit as an employee. No deduction is available to the trust for any expenses incurred in providing the benefit.
Do ACC levies apply?
| If your trust ... | then ... |
|---|---|
|
is an employer |
it must pay Accident Compensation Corporation (ACC) levies. |
|
employs a beneficiary |
the trust and the beneficiary-employee will pay ACC levies for liable earnings (eg salary and wages) paid to the beneficiary-employee. |
Levies for an employer include:
- ACC workplace cover levies
- residual claims levy
- health and safety in employment levy.
Salary and wage earners have their earners' levy included in the PAYE deduction.
Portfolio investment entity (PIE)
A portfolio investment entity (PIE) is an entity, such as a managed fund, that invests the contributions from investors in different types of investments.
Benefits of investing in a PIE
- Changes to the taxation of investment income enable managed funds that become PIEs to calculate their tax based on each investor's prescribed investor rate (PIR) (see below). Currently the fund pays tax at 33%. This can be reduced to 12.5% for investors that qualify for the lower rate.
- Generally there is more favourable treatment of disposals of certain Australasian shares.
- Where the trustee chooses 30% PIR and this has been used throughout the year and the trustee has not had the attributed income subject to the 0% rate, then this income will not be included in your income tax return. If the trustee chooses 12.5% or 21% PIR then the attributed income and associated tax credits are included in the trust return. If the trustee is attributed a loss then no PIE details are included in the return. Where the trustee chooses 0% or they have the default rate applied then both the income/loss and tax credits are included in the trust return.
Prescribed investor rate (PIR)
A prescribed investor rate (PIR) is the tax rate that your PIE is able to use to calculate tax on the income it derives from the investment of your contributions. The PIR is based on your taxable income, eg income from salary and wages and any additional sources of income that you would include in your income tax return and also income or loss from the PIE.
Anyone who invests (in certain types of) PIE should supply their PIR to the PIE, if requested.
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Date published: 30 Apr 2010
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