What is a family trust?
A family trust is a legal arrangement where a trustee (either a person or a company) holds and manages assets for the benefit of the family members, known as beneficiaries. It’s often used as a financial safety net that’s set up to support your family now and in the future.
Do I need a family trust?
Whether you need a family trust depends on your personal and financial circumstances. It’s commonly used for asset protection, tax planning, and estate planning. If these are areas of concern for you, a family trust might be beneficial.
What are the benefits of a family trust?
- Tax Efficiency: Income can be distributed to beneficiaries in lower tax brackets.
- Asset Protection: Keeps assets secure from personal financial troubles, like bankruptcy.
- Estate Planning: Helps manage and distribute assets after death without the need for a will.
- Flexibility: Allows for adaptable distributions to beneficiaries.
Can I reduce tax with a family trust?
To reduce tax with a family trust, the key strategy involves distributing the trust’s income among family members who are in lower tax brackets. This method, known as income splitting, allows the income to be taxed at lower rates, thereby reducing the overall tax liability.
For example, income can be distributed to non-working spouses, adult children, or retired family members, who may have little to no other income. Additionally, capital gains from the trust’s assets can be spread among various beneficiaries to take advantage of lower individual capital gains tax rates. However, it’s important to manage these distributions within the legal guidelines to avoid any potential issues with tax authorities.
Capital gains can also be distributed by the trustee of a family trust. A trust can obtain the 50% CGT discount if the distributions are made to individuals and even other trusts.
Related: How to Use a Family Trust to Save Tax
How much tax does a family trust pay?
In Australia, the tax rate for a family trust depends on how the income is distributed. If the trust distributes all its income to beneficiaries, the trust itself doesn’t pay tax; instead, beneficiaries pay tax based on their individual tax rates. However, if the trust retains any income, it is taxed at the highest individual marginal rate. Special rates apply to distributions to minors. Therefore, effective tax planning within a trust involves distributing income to beneficiaries in lower tax brackets to minimize the overall tax liability.
The same applies to capital gains.
Is the ATO cracking down on family trusts?
The Australian Taxation Office (ATO) has been paying closer attention to family trusts, particularly focusing on trusts that may be misusing the tax system. This includes ensuring compliance with tax laws and scrutinising arrangements that appear to be primarily for tax avoidance. In recent years, the focus has been using trusts to avoid Division 7A and section 100A using complex arrangements.
The ATO aims to ensure that family trusts are used within the legal framework and not for unintended tax benefits, emphasising the importance of adhering to proper trust management and reporting practices.
Do you have to do a tax return for a family trust?
Yes, in Australia, a family trust is required to file a tax return. The trustee of the trust is responsible for lodging a trust tax return with the Australian Taxation Office (ATO) each year. This return reports the trust’s income, deductions, and the distribution of its income to beneficiaries.
It’s important to note that the trust itself may not necessarily pay tax on its income. Instead, the tax liability often passes to the beneficiaries who received the income from the trust. They then report this income on their personal tax returns and pay any tax due. However, if the trust retains any income and does not distribute it, the trust may be liable to pay tax on that undistributed income.
The process requires careful accounting and adherence to tax laws, so it is strongly advised to seek assistance from a tax professional or accountant experienced in trust management.
How do I set up a family trust?
- Decide on the Trust Structure: Choose the beneficiaries and trustee.
- Draft the Trust Deed: This is a legal document outlining the trust’s operation. Standard deeds are usually suitable, however get advice if you have specific requirements.
- Settle the Trust: A nominal amount (like $100) is used to ‘settle’ the trust.
- Register the Trust: Obtain a TFN and ABN, and possibly register for GST and PAYG.
- Open a Bank Account: For the trust’s financial transactions including for investments or business as needed. Bank accounts are sometimes difficult to get for family trusts.
How does a family trust work?
The trustee manages the trust’s assets for the benefit of the beneficiaries. They make decisions about how to invest the assets and distribute income or capital to the beneficiaries, according to the trust deed.
Why set up a family trust?
- Tax Benefits: Distribute income to lower-taxed beneficiaries.
- Protection of Assets: Protect your assets from creditors or legal disputes.
- Succession Planning: Smooth transition of assets to future generations.
Advantages and disadvantages of a family trust
Advantages:
- Tax efficiency.
- Asset protection.
- Succession planning.
Disadvantages:
- Setup and maintenance costs.
- Compliance obligations.
- Less control over assets once they’re in the trust.
Can my salary be paid into a family trust?
Your salary as an individual cannot directly be paid into a family trust for tax purposes. Further the personal services in income rules may apply if you try to push contractor income into the family trust. However, a family business can distribute its profits from business and investments to beneficiaries.
Can I put a house into a family trust?
Yes, you can transfer the ownership of a house into a family trust. This might be done for asset protection or estate planning purposes. Get advice before doing so as it usually triggers stamp duty or transfer duty, and can have CGT implications.
Discretionary trust vs family trust: What’s the difference?
A family trust is a type of discretionary trust set up to benefit family members. In a discretionary trust, the trustee has discretion over how much each beneficiary receives, whereas in other trusts, distributions might be fixed.
Can an accountant set up a family trust?
Yes, an accountant can assist in setting up a family trust using a lawyer or an incorporation service. It’s important to also involve a lawyer to ensure the trust deed is legally sound of you have special requirements or you have a complex business structure. Tax lawyers are often engaged when a trust is involved in a complex structure.
Are family trusts a good idea?
Family trusts can be a good idea for asset protection, tax planning, and estate planning. However, they’re not suitable for everyone and require careful consideration of personal circumstances.
Are family trusts protected from divorce?
In a divorce, assets within a family trust might be considered during the settlement process as a financial resource. However, the protection they offer can vary based on individual circumstances and legal decisions.
Are family trusts protected from creditors?
Family trusts offer a level of protection against creditors, but this depends on how and when the trust was set up and how it’s been managed. Some clawbacks can occur for pre-bankruptcy gifts, for example.
Should I hire a lawyer to set up a family trust?
Yes, it is highly advisable to hire a lawyer when creating a family trust. Establishing a trust involves intricate legal documentation, including drafting the trust deed, which is the core document outlining how the trust will operate.
A lawyer ensures that the trust is set up correctly and complies with legal requirements. They can also provide valuable advice on the structure of the trust, tax implications, and how to best protect assets and interests of beneficiaries.
Given the complexities and potential legal and financial ramifications of incorrectly setting up a trust, professional legal guidance is crucial for peace of mind and to safeguard against future disputes or compliance issues.
Disclaimer: This material is produced by Cadena Legal, a NSW-registered legal practice. It is intended to provide general information and opinions on legal topics, current at the time of first publication. The contents do not constitute legal advice and should not be relied upon as such. Contact us here for advice.
