Family Trusts & The Tax Advantages

May 13th, 2009 | Posted in Trusts

Here’s a reply to a question that came through from the contact form From Grant

“Can you explain what family trusts are about and how/if they can benefit a small family (no kids)?”

There any many variables you will need to consider but I’ll give a general overview.

To make a family trust it costs around $1000, so if your your not going to save more than that, there’s really no point.

To be effect the income source needs to be over about $30,000 as long as only one person is making money. A vital factor is Personal services income or PSI which must be below 80% meaning that all the income has to come from more than 80% from one source.

A family trust is ideal for a service skill such as a plumber or lawyer as they serve many different clients and do not work for a company.

The benefits are that is the husband earns $50,000 and spouse earns 0 than they can split the income between the two.

EG. Person on $50,000 would pay $8850 in tax.
Where as two people on $25,000 each would pay $2,850 each or $5,700
Thus a saving of 8850 – 5700 -$1000 for the trust costs = $2150 saving per year.

If you did have kids, it can help the situation even more saving an each $400-$600 depending on your tax bracket.

If this sounds like you, see your tax agent to get more advice.

If anyone picks up that i have missed something above comment below or contact us.

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9 Comments

  1. 1
    joelpj // May 13th, 2009 at 3:07 pm

    Well explained

  2. 2
    Grant // May 14th, 2009 at 1:41 pm

    Sweet thanks.

  3. 3
    Tax Lawyer // May 1st, 2010 at 4:35 pm

    It is the correct observation that family trusts are expensive to set up and are really only justified if they fall over a very large amount of assets. They are very complicated legal instruments which can serve the interests of the professional services industry rather than their beneficiaries.

  4. 4
    Lev // July 29th, 2010 at 5:34 pm

    Thank you for the explanation.
    Well done!

  5. 5
    shafiq // November 16th, 2010 at 10:35 pm

    iam earning 600,000 alone my wife does not work so can i split my income in half between my wife and me.Can u please tell me if i can do that to reduce tax or can u tell me how much i can split between my partner and me.i want to reduce my tax.this is my family trust business and iam a doctor.

  6. 6
    Jennifer // December 13th, 2010 at 10:47 pm

    You havent mentioned the value of a family trust as protecting assets (like a house) from greedy partners. I mention this because my brother lost twice on girlfriend roulette. Never forget the other benefits besides tax.

  7. 7
    accountant melbourne // January 14th, 2011 at 11:59 am

    Well its true, if husband earns more money and spouse dont earn any money, its useful at the time of tax return, more expenses can be shown

  8. 8
    Accountants Caringbah // March 16th, 2011 at 11:51 am

    Other benefits of a discretionary trust include:
    - Access to the CGT Discount
    - Asset Protection
    - Potential access to small business CGT relief
    - Low cost and a simple structure to use
    - Flexibility with distribution and income splitting to lower tax bracket individuals.

  9. 9
    Chris Stanton-Cook // May 29th, 2011 at 7:55 pm

    Trusts
    With Bamford now “done and dusted” we now have a far better idea about income and how to share it around. It will no doubt take a year or two for the best strategies to flow through and become used to a majority of clients advantage.

    Our Government has once again in the 2011 budget thrown a spanner in the works by removing the low income rebate to minors on unearned income. This was clearly a strategy against the use of trusts to split income with minors and has now reduced the income that can be distributed to a minor, tax free, by about $3100.

    If used in the correct circumstances a trust is a powerful vehicle. Clients and accountants need to take each situation as it comes and look at the pros and cons before setting off on the Trust road.

    A far better way of looking at the use of a trust is to consider how long a business or the trust is likely to be “alive”. If the business or structure is to outlive the individual or individuals then the 80 year life of the trust makes it attractive. It could however leave the eventual beneficiaries with some significant headaches depending on legislative changes over time.

    Tax should never be the diving force behind a business vehicle. It leaves both the client and adviser open to accusations of setting up a scheme to avoid or worse still evade tax although I’m not aware of that happening yet.

    Similarly setting up a Trust with the specific reason of avoiding creditors could result in the structure being set aside and assets made available to the creditors in a bankruptcy situation. I’m told by an experienced liquidator that it is not a road they are keen to test but there may be a “soft belly” trust there someday that will not stand up to scrutiny.

    Use them wisely and as the law currently stands today there can be great benefits available to users including longevity,asset quarantining and tax flexibility.

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