Active or passive income
Active income is associated with trading activity of a business as distinct from passive income which is income generated from the holding of an asset (eg rent from property, dividends from shares).
The preferred trust for an active business is one that is able to maximise distributable income of the trust and at the same time be able to retain funds for working capital of the business. A discretionary trust is able to achieve both objectives by distributing income to a broad section of beneficiaries and retain cash for working capital needs of the business.
In contrast, the preferred trust for holding assets generating passive income is a fixed or unit trust.
Succession
If transferring ownership and control is important, whether active or passive asset, the unit or fixed trust provides greater flexibility than the discretionary trust. In a unit trust, succession is achieved by by transferring units in the unit trust including any shares held in a corporate trustee. Whilst the units do not give the recipient a proprietary interest in the asset, the units give the unit holders an interest in the surplus property that includes the trust assets which is the next best thing to a proprietary interest. In contrast, succession in relation to a discretionary trust is equated with transfer of control in the discretionary trust.
Tax
Tax comes into play because the chosen trust structure, whether for family or business use, is made by the persons who will largely benefit from the trust structure and they will want to know the tax implications during the life of the trust, upon changes to the trust and upon termination of the trust. The tax implications include direct tax (income and capital gains tax) and indirect taxes (land tax, stamp duty). It is not possible in this short space to elaborate on the tax profile of each trust structure, suffice to say that for each structure there tax pros and cons.
