The Partnership of Discretionary Trusts

• To own and operate a business on behalf of multiple families.
• To hold multiple families' passive investments (incl. shares or property).

Note: applies where access to the small business CGT concessions or the ability of each discretionary trust partner to make its own family trust election is important.

• The structure is not protected from claims by creditors of discretionary trust partners.
• Discretionary trust partners are not protected from claims by creditors of structure. In fact, discretionary trust partners have joint and several liability for any liabilities of the structure.
• Discretionary trust partners are protected from claims by creditors of beneficiaries.
• Beneficiaries are protected from claims by creditors of discretionary trust partners.

Note: the availability of asset protection is based upon the structure itself. Care should always be taken to review loans/entitlements that may exist between the various parties including personal guarantees that may have been given.

INCOME TAXATION

• Income accumulated by the structure will be taxed in the hands of the discretionary trust partners at the highest marginal income tax rate plus the Medicare levy (46.5%).
• Flow-through taxation applies, so that income distributed by the discretionary trust partners will be taxed in the hands of the recipients at their income tax rate.
• There is flexibility to distribute income (including income with certain characteristics – for example, franked dividends) to any one or more beneficiaries of the discretionary trust partners (subject to personal services income and Part IVA issues).

RELEVANT CGT ASSET		The interest in the partnership (s.108-5)
50% DISCOUNT		Available
	50% ACTIVE ASSET REDUCTION	Available
	15 YEAR EXEMPTION	Available (if there is a significant individual1 throughout a total of 15 years)
	RETIREMENT EXEMPTION	Available (if there is a significant individual1 in the year of disposal)
	ROLL-OVER	Available

Note: the availability of CGT concessions only relates to the availability to the structure. Consideration must be given to the requirements for accessing the concessions outlined in ITAA 97, and the requirement to distribute amounts of net capital gains in some circumstances to avoid the benefit of the concession being eroded by gross-up rules in sub-division 115-C of ITAA 97.

• The assets of the structure are not owned by any one beneficiary and do not form part of a beneficiary’s estate upon their death.
• No discretionary trust partner has any specific interest in the partnership.
• Ultimate control of the structure resides with the discretionary trust partners who at a meeting may remove and appoint trustees.

• Varying the proportionate interests in the partnership, or adding new partners, may result in a capital gains tax liability for the partners.

• A significant benefit is that each discretionary trust partner may make their own decisions concerning the ability to access the small business CGT concessions, determining the existence of a controlling individual and making family trust elections and interposed entity elections. The ability of each discretionary trust partner to make their own decisions in respect of making family trust elections and interposed entity elections is important to enable the discretionary trust partner to carry forward losses and to distribute franked dividends.
• Alternative structures (such as hybrid trusts) jointly assess the relevant tests and accordingly may not satisfy small business CGT concession requirements such as the controlling individual test.