How is a family trust taxed in Australia?

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How is a family trust taxed in Australia
Tax Minimisation
By
John Liston
John Liston
Director | Adviser
March 30, 2020
3
minute read

The key points to consider when setting up a family trust

Running a thriving business is every family business owners' dream. But as your business grows, so do your tax obligations.

A family trust can be a suitable option for business owners looking to take advantage of tax-effective planning.

Liston Newton Advisory provides advice and guidance for business owners looking to set their business up for success. Read more about the taxation advice we can offer.

What is a family trust?

As the name suggests, a family trust is a type of trust fund that is set up to conduct a family business or hold your family's assets.

When you set up a family trust, the fund then owns all assets it gets assigned. If you then nominate a company as the trustee, this effectively shields those assets from liability and works to protect your family's assets.

If you run a growing family business, a family trust can be a robust way to look after your family secure your assets. You can assign your family members as beneficiaries of your business, allowing them to receive income directly from the trust.

A family trust can also act as a holding structure for your family investments, protecting them from legal or financial liability.

There are two common types of family trust structures. This article focuses on the discretionary trust structure.

Family/discretionary trust

This is the most flexible type of family trust structure and it operates strictly within a single family group. It's also known as a discretionary trust, as the beneficiaries don't claim a fixed income. Instead, you're able to set different income percentages for different beneficiaries, and these amounts can change from year to year.

Unit/fixed trust

Also known as a fixed trust, a unit trust operates much the same way that shares do. Profit is divided according to the beneficiary's unit holding, and distributed among the beneficiaries according to an agreed percentage.

A unit trust allows for more than one family group to be involved in the fund.

Tax rates for a family trust

A family trust typically pays zero tax on income from within the trust. Instead, the income is distributed to the beneficiaries, who are taxed at their personal tax rates. The trustee of the fund decides whowithin the family receives the distributions. They are free to distribute the income to as many beneficiaries as they see fit.

Making the correct calculations when distributing the income proportions will enable the family to take advantage of each beneficiaries' personal tax rates. The only instance in which a family trust does pay tax is if the income isn't distributed to its beneficiaries. In this case, the trust gets taxed at the highest marginal tax rate.

Example

A sole trader earns $200k profit from their business, and therefore they receive all the income themselves. This results in an estimated $67k in tax payable to the business owner.

But say the same business operates as a family trust. The business owner then can split the income among their family members. If split equally, each family member would receive approximately $66.6k each. As each family member is taxed at their individual tax rates on this distribution, the combined tax payable would reduce to approximately $40k in total. This is a tax saving of $27k every year.

Set up costs for a family trust

When setting up a family trust, you can expect to pay between $1,500 and $2,500 +GST.

This includes:

  • Creation of the trust deed
  • Advice on who should be nominated as the trustee, appointor, and settlor
  • Advice on who the beneficiaries should be
  • Registration of its tax file number with the ATO
  • Registration of an ABN and GST (if needed).

Franked distributions

As outlined by the ATO, franked distributions can be included in the family trust's net income, and distributed to its beneficiaries for tax purposes.

However, unlike regular business income, the allocations for these amounts must be formally detailed in the trust deed. The trust deed can also prevent beneficiaries from receiving franked distributions.

Where no beneficiary is appointed, the franked distribution is taxed proportionately between the beneficiaries based on their usual entitlement to the trust's income.

If the beneficiary qualifies for a franking credit offset, they're required to include this amount in their assessable income.

The final word

Running a growing family business is exciting. However, without proper tax planning, you could lose up to 49% of your business profits in tax. If you're considering an effective way to minimise the tax payable on your business' income, then a family trust might be right for your situation.

You also receive a level of comfort that your family's assets are secure, and you're creating a long-term structure that can set your family up for a comfortable future.

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