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Whether you are a founder of a business, an investor in a company or an employee who owns shares in a company, the shares you own can be a very valuable asset. It is therefore important to consider how you hold those shares to protect them and effectively manage any financial returns you receive from them. One of the most common methods of holding shares in a company is through a discretionary trust. This article will explain the advantages and disadvantages of owning shares through a trust, and how to hold and transfer shares to your trust.

What is a Trust?

A trust is a legal arrangement where a trustee holds and manages assets for the benefit of the trust’s beneficiaries. A trustee can consist of one or more individuals. Alternatively, a trust can also be managed by a company. The trustee who is in charge of managing the trust in this case is known as a ‘corporate trustee‘.

The most common type of trust which people will use to hold their shares are ‘discretionary trusts’. These are often referred to as ‘family trusts‘. Discretionary trusts allow the trustee to have discretion in how they distribute trust income between the beneficiaries. Another type of trust is a ‘unit trust’, where the beneficiaries have a specific or fixed entitlement to receive trust income.

Advantages

There are many reasons why it can be useful to hold your shares through a trust, including for: 

  • tax planning; 
  • tax benefits; 
  • ease of succession; and 
  • asset protection. 

Tax Planning 

Any income you receive from shares you personally own will be taxed at your personal marginal tax rate.

However, with a discretionary trust, the trustee can distribute income to the beneficiaries at its discretion. This means that if the trust’s beneficiaries include members of your family with a lower marginal tax rate, the trustee can distribute any income derived from your shares to lower tax-paying members of your family. This is beneficial because it allows you to minimise the overall tax payable on income received from your shares.

Tax Benefits 

If your trust holds shares for a minimum of 12 months, it may be eligible for the 50% capital gains tax (‘CGT’) discount. This discount can be beneficial you sell your shares. 

The CGT discount is also available if the holder of shares is an individual. However, the CGT discount is not available to companies.

Ease of Succession 

Another benefit of using a discretionary trust to hold shares is that you can pass the control of a discretionary trust to the next generation without triggering tax consequences. This will also be the same for any assets the trust owns. However, if a shareholder is an individual, transferring shares to someone else requires you to sell them to the new owner which triggers tax consequences.

Asset Protection 

Finally, having a trust allows a degree of separation between assets owned by you, and assets owned by your trust.

For example, shares owned by your trust may be better protected from creditors’ claims than those owned by you personally.

Indeed, this degree of separation will be the case especially if your trust has a corporate trustee.

Disadvantages

Setting up a trust can have an additional administrative and financial burden. You will need to establish the trust itself and pay for the upkeep. For example, this could mean having an accountant assist you with trust’s tax returns each year. 

You should also be aware of the limits on tax planning through a trust. For example, tax income distributed to minors will generally be taxed at the highest marginal tax rate. The trustee will also be liable to pay tax at the highest marginal rate on any income that is undistributed at the end of the financial year.

How to Hold Your Shares Through a Trust

If you are being issued or transferred shares and you want those shares to be held by your trust, you will need to: 

  • inform the company that you will be holding your shares through a trust; and 
  • provide the company with your trust’s details. 

The shareholder of the shares will be the trustee ‘as trustee for’ the trust. This is because a trustee holds assets on behalf of the trust. The phrase ‘as trustee for’ is often abbreviated to ‘ATF’.

For example, if you:

  • are the trustee of your trust, the shareholder of your shares will be ‘Jane Smith ATF Smith Family Trust’. 
  • have a corporate trustee, the shareholder of your shares will be ‘Smith Pty Ltd ACN 123 456 789 ATF Smith Family Trust’.

The company’s internal records (primarily its ‘register of members‘), ASIC records and share certificate will reflect the fact that the trustee is the shareholder of your shares. The company will also record in its register of members and on ASIC that the trustee holds its shares’ non-beneficially’. This is because the trustee holds the shares for the benefit of the trust, not for itself.

How to Move Shares Into Your Trust

What Is the Process of Transferring Shares to My Trust?

If you want any existing shares you own to be held by your trust instead, you will need to transfer those shares to your trust. 

You will need to inform the company that you intend to transfer your shares to your trust. This is so that the company can: 

  • update its register of members; 
  • issue you with a new share certificate reflecting that your trust now holds your shares; and
  • notify ASIC of the change. 

If the company you own shares in has documents that govern it (e.g. a company constitution and shareholders agreement), this may affect the process of transferring shares. Often a company’s constitution or shareholders agreement will require that shareholders first offer shares to other company shareholders for purchase before transferring them to a third party. This is because of shareholders’ ‘pre-emptive rights’. If this is the case, the other shareholders will have to waive their pre-emptive rights before you can transfer your shares to your trust. 

However, the company’s constitution or shareholders agreement may include an exemption that allows you to transfer your shares to your trust without having to offer those shares to other shareholders first because the trust is considered your ‘affiliate’.

Tax Consequences

Whenever you transfer shares, including to your trust, there may be capital gains tax (CGT) consequences. If the shares you are transferring to your trust are of high value, you should seek tax advice to understand whether the immediate tax consequences of transferring shares to your trust outweighs any long-term advantages.

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Key Takeaways

Owning shares in a company through a discretionary trust is very common and can have many advantages. Specifically, if you own shares through a trust, it will allow for greater tax planning flexibility than if you were to own them purely in your individual capacity. Furthermore, you may be entitled to capital gains tax. The ease of succession and asset protection is also far greater through a trust. However, setting one up can be a financial and logistical burden. Therefore, it is important to weigh up the advantages and disadvantages and consider whether it would be useful in your personal circumstances. If you have questions about holding shares through a trust, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page. 

Frequently Asked Questions

What tax benefits do I receive if I use a trust to hold shares?

The trustee of a discretionary trust can distribute income to beneficiaries who have a lower marginal income tax rate. This will minimise your shares’ overall tax liabilities. Additionally, if your trust holds the shares for at least 12 months, a capital gains tax discount may apply.

How do I transfer the shares I own to my trust?

You will need to inform the company issuing the shares that you will be holding them through a trust and also provide your trust’s details. This is necessary to ensure the company’s internal records reflect this change.

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