12 – Practice trusts for personal services income practices

Trusts are best

If your income is  personal services income (ie does not meet the ATO’s definition of “business income”) the simplest, safest and cheapest way to set and run your practice is through a trust based structure.

Dover advisers can set trusts up for free (exclude trustee company formations) using Dover’s LegalEDocs service.

Solo practice that is not a business for tax purposes

If you practise on your own, in the sense you own the whole practice and are not a co-owner, and your practice is not a business a family trust is probably your best option.

Family trusts, also known as a discretionary trusts, are the most common form of business organisation in Australia.

For a solo financial planning practice that is not a business a family trust structure allows:

  • personal services income derived by the trust to be distributed to the financial planner who generated it, in line with the ATO’s rulings on professional practice incme; and
  • other income, particularly renewal commission income, which the ATO says is not personal services income (because it runs with the register) can be distributed to low tax rate beneficiaries including companies.

If the practice develops into a business for tax purposes the restriction that personal services income has to be distributed to the financial planner can be dropped. This means the family trust structure is very flexible and copes with changes to the nature of the practice.

Diagram of a practice trust for a practice that is not a business

Diagram-of-a-practice-trust-for-a-practice-that-is-not-a-business

The Dover Group