What are Trusts and How Can You Use them to Cut Your Tax Rate?
Trusts are formed to manage wealth on behalf a designated beneficiary. A third party, the trustee, will hold the trust assets on behalf of these designated beneficiaries. The trustee can be an individual or a company offering these services. While all the assets that are bestowed on the trust are owned by the trust, it is the trustee that has complete legal control of the trust and will be making the day to day legal decisions on the management of its assets.
It is often a complex relationship but one that has worked well for generations to protect generational wealth. Some people use trusts to assist them in executing their life’s missions even when they are long dead.
But a trust isn’t just useful in preserving generational wealth; it can also be a tax-saving strategy. Many wealthy Australian families are now forming family trusts with the sole aim of minimizing tax burdens. While the Australian Tax Office has been hammering on these tax-minimization antics, there are still lots of pathways that you can exploit to make huge tax savings and preserve your wealth for estate planning and retirement purposes.
Some of the commonest types of trusts that are often used for tax minimization are the discretionary trusts. Examples of these include the family trusts and business trusts. These are formed as asset holding vehicles and not necessarily used for estate planning purposes. A professional accounting firm Melbourne has can assist you in forming a family trust that you can use to park your investments and pass the income on to beneficiaries without incurring a heavy tax burden.
By setting up a family trust, a high income earner can end up savings ten of thousands of dollars by channeling the wealth to some family members who fall in the lower income bracket. This strategy is known as streaming.
For example, parents may apportion trust earnings to their adult children if they fall in a lower income tax bracket. In Australia, there is a $18,200 tax-free threshold, meaning that if the investment income from the trust falls below this, your kids will not be liable for any taxes. The streaming strategy should only be used on kids who are at least the age of 18.
However, streaming trust income, whether capital gains or franked distributions, is a complex procedure and it is advisable to seek the services of a professional chartered accountant Melbourne has in order to ensure that the process goes on as smoothly as possible.
You must be familiar with the rules of streaming as set out by the tax authorities. For example, if you don’t stream trust income by June 30, the assessment of the trustee by tax authorities will be carried out based on the top marginal income earned by the trust and you will end up paying higher taxes.
Family trusts are not without disadvantages, though. They are very costly to run and to justify the cost of setting up one, you must have built several hundred thousands of dollars in savings. They have also come under increasing scrutiny by the Australian Tax Office due to their widespread deployment in tax minimization strategies so you need to solicit professional advice from a chartered accountant South Yarra offers who can assist you in navigating some of the potential pitfalls of setting up a discretionary trusts.
Here are additional tips to keep in mind when you are planning to set up a family trust for tax-minimization purposes:-
Maximize on the Tax-Free Thresholds: If you have adult kids in the house who are either unemployed or partially employed, maximize on their $18,200 tax-free threshold by sending them higher allocations of the trust’s investment income. Talk to a professional accounting firm Melbourne has to help you structure out your trust’s investment income accordingly to minimize the tax burden.
Make Trust Allocations by June 30: If you fail to make allocations for your trust’s investment income to the beneficiaries by June 30, the trust may be liable to the top marginal taxation rate. With trust streaming, you can lower tax obligations to almost zero depending on the number of members in the trust and the trust’s investment income.
Allocate the franking credits and capital gains on low earners: Investing the franking credits and capital gains on the lowest income earners among the trust beneficiaries will significantly reduce your tax burden.
Make bigger trust contributions: While there is a limitation on how much you can put in a self managed super fund annually, there aren’t any thresholds for trust contributions. You can therefore bank vast sums of money in a family trust and make significant tax savings by using the strategies mentioned above.