Running a psychology business through a trust – can it be done?

Yes. But it must be done “right”!

If you would like to run your psychology business through a trust, a formal deed outlining how the trust will operate is required. The trick is to ensure you are set up with a robust  trust deed from the outset from a lawyer who can explain how it works to you in language you can understand (ie. Jess from Sinclair + May!). Trust deeds are extremely complicated – so although this step is likely to be expensive, it is a necessary investment.

Changing either the trust deed itself, or to an entirely different business model once you have set your trust up, will likely be difficult and/or costly, and may expose you to further tax liabilities, so it’s important you get good advice and be certain of your arrangements from the start.

Tax requirements

As part of setting up:

  • The trust must apply for a Tax File Number from the ATO and lodge an annual trust Return.
  • The trust must apply for an ABN and use this in all business dealings.
  • The trust must register for GST if annual GST turnover is $75,000 or more – which is likely.

The trust will not be liable to pay tax – tax is assessed against  the trustee or the beneficiaries that are entitled to receive net income from the trust, as provided for under the trust deed (so, you, and any other beneficiaries you nominate.)

If you are operating a small psychology business through a trust, you may unfortunately be subject to ‘Personal Services Income’ (PSI) rules, which means your income will be attributed back to you as an individual taxpayer and eligible tax deductions will be limited. This is because you may be considered to be  receiving income as a reward for personal effort or skill.

To be exempt from PSI, you must qualify as a ‘Personal Services Business’ which means you must:

  • Meet the results test (which can be difficult to satisfy for a psychology business as ye need to demonstrate that at least 75% of your income is paid to you to produce a specific result); and
  • Less than 80% of your income must come from one client (this is likely) and;
  • Pass either

    • Unrelated clients test (to show that you provide services to at least 2 unrelated clients that are not associates of each other or yourself, and service is a result of you offering your service to the public through advertising, word or mouth, website etc.); or
    • Employment test (that you employ an employee or apprentice); or
    • Business premises test (that you maintain a premises used exclusively for your psychologist appointments)
  • OR if you do not pass the tests, you can apply to the ATO to be considered as a Personal Services Business and avoid PSI tax.

As the tax rate for small companies is 27.5% – much better than top personal tax rate of 45%, and companies can claim a wider range of tax deductions, it is a worthwhile consideration.

To work out whether you are caught by the rules seek professional legal advice.he rules are complicated and you are responsible for correctly reporting your income – penalties may apply if you report your income incorrectly or claim deductions you are not entitled to.

What are the advantages?

Asset protection against liability  – especially if the trustee is a company. In the unfortunate event that you as a professional or as a business are sued by a client, your assets are protected because they are owned by separate entity, and possibly even provided under licence. Assets may include intangibles such as your intellectual property, website, social media and so on, as well as tangible items.

Flexibility of asset and income distribution – operating as a trust allows you to distribute income in order to minimize tax if desired.

Some points to consider before moving ahead:

The initial outlay of time and financial resources n setting up the trust and preparing the trust deed is likely to be significant, and (depending on the trust deed) the trust may also be reasonably expensive to administer on an ongoing basis (the trustee is required to complete yearly formal administrative tasks). Trusts are also difficult to dissolve or make changes to once set up.

If your psychology business engages  a few psychologists under the one trust you must have a company as the trustee. Firstly, because the trust will only be able to distribute profits, not losses; and secondly because the trustee will be legally liable for the debts of the trust.

Finally, in terms of tax, it’s worth noting that profits re-invested into the business will most likely incur penalty rates.

This is general advice only. Liability limited by a scheme approved under Professional Standards Legislation. 

Published Feb 2, 2018

Go back