- What is a Family Trust
- Common Uses for Trusts
- Pre 30 June Considerations
- Lodgement Deferrals
- Trust Distributions
What is a Family Trust?
A Trust is a relationship between a person or organisation (the trustee) who is responsible for holding assets for the benefit of other people (the beneficiaries). It’s a great way to manage tax and protect assets.
It’s best to first explain a Discretionary Trust, which is where the people managing the Trust (trustees) choose who can benefit (beneficiaries) and how much they will receive. A Family Trust, in particular, is a Discretionary Trust that is set up to hold a family’s assets or run a family business. Generally one or more family members will manage the Trust for the benefit of their family as a whole. This often leads to tax advantageous outcomes as the Family Trust allows you to distribute taxable profit amongst various family members.
Common Uses for Trusts
Trusts are flexible and widely used for investment and business purposes. In a Trust, it is possible to give different people rights to the income and capital and despite not being a legal entity, there are a wide range of activities that a Trust can be used for including:
- Running a business
- Owning property
- Holding investments
- Protecting assets
- Managing assets within a Will
The use of Trusts are common within our client base due to the many benefits they offer. These can include:
- Asset Protection through the separation of business assets, their investments and their personal assets
- Avoiding unnecessary transfer costs and tax consequences when transferring wealth from one generation to the next
- Their flexibility in distributing income, allowing family groups to balance their income and taxation positions
- The ability and flexibility to distribute capital gains made by a Trust to the beneficiaries
You should regularly review your situation and gain advice regarding your current structure to evaluate if a Trust structure is the best option for you, your business and your family.
Pre-30 June Considerations
The ease to nominate and change the beneficiaries of a Trust are one of the many attractive elements of establishing a Trust in the first place. However, consideration should be given to their eligibility as a beneficiary, based on the deed and Family Trust elections and what impacts the Trust distributions may have on a beneficiary’s tax position. It would be highly valuable to talk with us or a trusted accountant about using the most efficient distribution structure and assisting with documentation.
- Adding new beneficiaries
As a Trustee you have an obligation to report any new beneficiaries for your Trust to the ATO. As part of tax planning, BLG assists with a review all beneficiaries for your Trust and ensures necessary reporting is compliant and submitted. Any new beneficiaries’ TFN will need to be submitted to the ATO prior to 31st July 2021. Be sure to let us know if any of your Trust beneficiaries are not Australian residents.
- Low income tax offset and minors reminder
The low income offset is not available to minors who only receive ‘unearned’ income (e.g. distributions from a discretionary trust). Minors can typically only receive $416 of unearned income prior to being taxed at a high rate.
- Streaming of franked dividends and capital gains
Trustees are only able to stream franked dividends (and the franking credits that are attached to those dividends) to a particular beneficiary for tax purposes if the Trust deed allows for streaming to occur and if the minute has been correctly documented prior to 30 June 2021. There are other requirements that need to be in place to ensure the franking credits attached to a franked distribution are able to flow out to the beneficiary, however our team will assist with this when preparing the Income Tax Return of the Trust.
If valid resolutions are not in place by 30 June 2021, the risk is that the taxable income of the Trust will be assessed in the hands of a default beneficiary (if the Trust deed provides for this) or to the Trustee (in which case, the highest marginal rate of tax would normally apply currently being 47%).
If you have not already finalised your Trust’s 2020 Income Tax Return, the ATO has automatically deferred 2019-20 Trust tax returns lodged through a tax agent until 5 June 2021. This deferral excludes medium to large taxpayers.
The dynamic nature of family relationships can make managing distributions within a Family Trust complex. Cashing out distributions to beneficiaries is one measure that demonstrates the beneficiary has received the entitlement of the distribution.
It is important to note the ramifications of making a distribution from a Discretionary Trust. A distribution does create an entitlement between the Trust and the beneficiary and although some families reinvest the Trust’s income back into the business and allow beneficiary balances to grow, this does give the beneficiary an entitlement to call on the loan as need. In this situation, the trust may wish to review and cash out the 30 June beneficiary balance of the prior year each year. We can assist with quantifying this amount.
The benefits of a cashed out distribution are twofold:
- 1. Directing funds from the Family Trust bank account to the beneficiary provides a transparent way of showing the beneficiary has received the legal entitlement to the distribution; and
- 2. A cash distribution is a clear demonstration of a present entitlement to the funds, reinforcing the validity of the distribution for tax purposes.
The cashing out process does have clear tax advantages, and the flow of business funds can be managed after the tax cycle through business planning. Although you may feel discomfort discussing distributions and your family dynamics, it does solidify the Trust structure for tax purposes and ensures beneficiary loan balances do not build up substantially.
There are many variables to consider with Trusts and talking to a trusted accountant or business adviser is often the best course of action before making a restructure decision. If you don’t have an adviser to help you out, then chatting with our team at BLG can be of significant value to you. Have a talk with our team today and find out if our approach suits your needs.
We wish you and your business every success!