Family trusts are commonly used by Australians for tax advantages, asset protection and efficient estate planning. But despite their popularity, the tax implications associated with family trusts are frequently a source of confusion. In this article, we’ll address everything you need to know about family trusts as we delve into their advantages and how you can harness their potential benefits.
Family trust tax advantages
Family trusts, also known as discretionary trusts, are the most flexible type of family trust as you can set different income percentages for individual beneficiaries. Many people choose family trusts in order to look after their family and secure their assets. They also offer significant tax benefits which we’ll discuss below.
Income splitting and tax efficiency
One of the main tax advantages of family trusts is that they are structured to allow for income splitting among family members. As such, income generated by the trust from business activities and investments can be distributed to beneficiaries in lower tax brackets (such as spouses, children, or grandchildren), which reduces the overall tax burden.
Generally, there is zero tax to be paid on income from within the trust, and the income is distributed to the beneficiaries who are taxed at their personal tax rates. No beneficiary has an entitlement to receive a specific amount of income, which means that trustees can stream income in a tax-effective way on a year-to-year basis.
When does a family trust need to pay tax on its income?
Despite the tax benefits associated with family trusts, there are some situations where a trustee may be liable to pay tax on trust income. For example, when trust income is distributed to a beneficiary who is not an Australian resident for tax purposes, the trustee must pay tax on their behalf.
Trustees must also pay tax on behalf of their beneficiaries under 18 years old on the 30th of June of the relevant financial year. If the distribution to a minor is greater than $1,308, the top marginal rate of 45% is imposed on that portion of the trust income.
Lastly, if the trust income is not fully distributed to the beneficiaries, whether this is by purpose or inadvertently, the trustee must pay tax on the remaining income, again at the top marginal rate of 45%. For this reason, many trustees aim to distribute all of the trust’s net income to avoid paying tax on the remaining income.
If the trustee decides to distribute a portion of the trust income to a party outside of the trust’s beneficiaries, they will be subject to family trust distribution tax (FTDT). Distributions made to individuals outside of the beneficiaries will trigger FTDT at 47%.
Capital gains tax benefits
Usually, when you make a profit from the sale of an asset, you’ll have to pay a Capital Gains Tax (CGT). Australian family trusts do pay CGT. However, they receive a 50% discount on CGT for any profit made from selling assets that the trust has held for more than 12 months.
This is a major reason family trusts are popular among families who want to pass wealth down to the next generation.
Family trust asset protection
Family trusts are a popular choice for protecting family assets. One of the biggest family trust benefits is that it can help protect assets from financial liabilities. For example, because the beneficiaries of a family trust don’t own any of its assets, these assets can remain safe even if a beneficiary becomes bankrupt or owes money to someone under a court order.
To maximise asset protection in family trusts, it’s important for the trustee to consider any debts the trust owes to members of the family. Often, parents will lend money to their family trust so the trustee can use it to make investments.
This means that the money is recorded as a liability of the trust, and creditors may be able to access the trust’s assets for debt recovery.
Family trust estate planning benefits
Family trusts facilitate the smooth, tax-free transfer of wealth from one generation to the next.
A family trust can also be useful for estate planning as it allows the trustee to pass control of family assets onto family members rather than giving the assets to individuals outright.
The trustee has the ability to choose how their assets should be distributed after their passing. They can also specify the conditions and timing of distribution to beneficiaries, allowing for full control over the distribution of assets.
By facilitating the efficient management, protection, and transfer of assets, family trusts can be a valuable tool for passing on your wealth while minimising tax liabilities.
Getting family trust advice
Financial Spectrum’s experienced financial planners and accountants can help you navigate the complexities of family trusts. For tailored advice on maximising your wealth and protecting your assets for your loved ones, book a free, no-obligation meeting with one of our financial experts today.