Need reminding to lodge your monthly or quarterly BAS on time?

Then join the AFYF mailing list and receive ongoing information, news and updates on the latest tax, business, marketing and accounting developments. We’ll even remind you to lodge your BAS on time!

Out Sourcery

  • Bookkeeping
  • MYOB Setup and Training
  • Business Systems and Management

MYOB | Professional Partner learn more »
 

Disclaimer

This is not advice. Items herein are general comments only and do not constitute or convey advice per se. The information contained in these articles is for guidance only and should not be relied upon without obtaining professional advice having regard to your direct circumstances.

 

Trusts you can bank on

So, you think you're paying too much tax. Well, one way to minimise tax and maximise wealth is by setting up a family trust. And don't think it's all about having children.

Family trusts (also known as discretionary trusts) are one of the most common structures used to reduce hefty tax bills and protect assets from creditors.

WHAT ARE THEY?

You can create a family trust to hold your property and as trustees you and your partner get to decide what to do with it on behalf of your beneficiaries, which can be yourselves.

As a business owner, you might be attracted to the offer of some protection from bankruptcy and insolvency. As a parent, you might be interested in estate planning. As the owner of capital growth or income-generating assets, though, you really should get some advice about family trusts. Ultimately, the main attraction here is the fact that you can share the tax burden among family members.

Once you've set up your trust, appointed the trustees and transferred your assets you need to set up a deed to detail how the trust will operate. This must include which beneficiaries can receive investment income from the trust. An important point about family trusts is that all income earned in the trust must be distributed every year.

BENEFITS

You can distribute income (dividends, rent and investments) to family members on the lowest tax rates, thus reducing your tax payout. So you could elect to distribute investment income to children under 18 (who can receive up to $1333 tax-free each year, including the low-income earners' offset); you could distribute to children over 18 (who can earn up to $10,000 a year without paying tax) and finally you could distribute to a low-income or non-working spouse (to take advantage of their lower marginal tax rate). The rest could go into a company which reinvests it and where the maximum tax payable will be 30 per cent. That money could then be further invested or placed in a super fund - also under favourable tax conditions - until retirement age.

So if, for example, your family trust owned an investment property and there were substantial capital gains, these gains could be distributed to low-income family members. This might be a far better deal than the higher earner paying tax on the capital gains. Mind you, if your rental income was less than the mortgage payments, you would carry an investment loss. Outside a family trust, this loss could be used as a deduction for income tax for the higher earner. Family trusts are not such great use here because investment losses cannot be passed through to the beneficiaries but are retained in the trust.

HORSES FOR COURSES

Every family situation will be different. Take estate planning: now you can clone your family trust and transfer assets without incurring capital gains as certain conditions are met (the tax office stipulates the beneficiaries and the terms of both the original and the cloned trust must be the same). Say you already have a family trust and it owns your business as well as an investment property. You want control of these assets to be separate - perhaps with only one asset going to each of your two children. By cloning the original trust and transferring the property to the cloned trust, you can change the control of the assets and if one child wants to use the property as security for a loan they can do this without the sibling taking on any of the risk.

Cloned trusts can have even more benefits, depending on where you live. For example, a transfer of farming land in South Australia in cloned trusts between specified family members is exempt from stamp duty, provided certain other criteria are met.

In another scenario, you might be near retirement age, in which case paying more money from your family trust into your super, rather than making distributions to your children over 18, makes more sense. Thanks to a tax office ruling last year, directors of the corporate trustee of a family trust are classified as employees of that company, which means members can enjoy tax concessions on super contributions paid direct from the trust. This is how it works: self-employees can claim a tax deduction on any super contribution up to the cap of $50,000 a year if under 50 or $100,000 if over 50, up until 2011-12 and any salary-sacrifice or superannuation guarantee attracts just 15 per cent contributions tax. So by paying into your super you're also reducing the tax you pay on the trust's distributed earnings.

Any contribution made from your family trust must go into a complying fund and you must adhere to the contribution caps and you must be an Australian resident. And since you only need to receive an income of as little as $100 to get a deduction on your super, setting up a family trust will be most useful for those on salary and wages with lots of investments who cannot salary sacrifice as much as they would like.

WHAT YOU NEED TO KNOW TO GET UP AND RUNNING

IT IS necessary for you to be actively involved in the running of the trust. A recent research report from trust management business Integrity Trust found that nearly 25 per cent of family trusts would not stand up in court. Family trusts need to be administered every year. Trustees must be involved in all the decisions, participate in annual formal meetings, record the decisions and prepare annual financial statements. There must also be a written investment policy. Meanwhile all relevant insurances must be in the name of the trust. There must be a separate trust bank account and the trust must be free of borrowings.

Helena Keers
May 11, 2008
The Sydney Morning Herald

 


« Back