Tuesday, June 11, 2013

What are the main advantages and disadvantages of using a partnership of discretionary trusts for a professional practice?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘What are the main advantages and disadvantages of using a partnership of discretionary trusts for a professional practice?’ at the following link - http://youtu.be/AzNQv_QLMd4

As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –

I'll start with the advantages and there are many.  Probably the biggest one is the access to the small business concessions moving forward.  Again as we've touched on in other parts of today’s program, the ability for a partnership of trusts for each individual partner to gain access to the small business concessions is one that just simply cannot be ignored. 

Obviously, discretionary trusts are the vehicle of choice by and large for most small to medium sized businesses these days.  So the ability to combine both the small business concession access with individual autonomy and flexibility on income tax planning is very attractive. 

The other issue I guess with a partnership of discretionary trusts is that it's relatively simple to explain and understand.  This point is often in the eye of the beholder and we'll talk in a moment about some of the disadvantages and how this same advantage can in fact be a disadvantage, particularly in larger practices.  This issue can often be managed by making sure that the one company is trustee for all trusts in the group, and also perhaps acting as a nominee to the outside world, so that as far as clients are concerned, they are in fact only dealing with one entity, being the corporate trustee of a number of different trusts. 

I guess the final point to make however in relation to the advantages is that the ability to limit liability to the actual interest in the practice is solely dependent on the actual trust making sure that it only owns one asset, being it’s interest in the partnership.  So in other words, the attraction of perhaps having different assets inside that one structure very much diminishes the ability to limit liability in relation to issues that might arise. 

The disadvantages are probably not dissimilar to the advantages, just looking at things from the other side of the fence obviously.  I touched on in the advantages that the ability to have a number of partners in partnership via the trust structure can be an advantage.  Obviously, it can be a disadvantage as well, and particularly as partnerships get bigger, the concept of having countless discretionary trusts involved can administratively be quite prohibitive.  Now   argument would be that as long as you have the same corporate trustee across the group, that can be attractive. 

This of itself creates further issues, particularly from a control perspective, because you then need to have the individual trusts looking very carefully at issues such as the appointorship, to make sure that if there is disharmony within the partnership that there's an exit mechanism, via the trusts, for each of the individual partners. 

Conceptually also, while the attraction of the small business concessions is very strong, you are not getting away from the stamp duty costs.  So in other words, if an individual trust decides to dispose of its partnership interest, it will still very much be exposed to all of the normal stamp duty costs at an ad valorem rate, on the full unencumbered value of interest in the partnership. 

The last point, and this is in direct contrast to what the situation is for companies, is that you do not really have a corporate model.  So all of the normal advantages that you associate with incorporation, such as employee share arrangements, become very difficult indeed to achieve, because you've got this disparate structure of a number of different trusts involved in relation to the partnership.

Until next week.