What is a family trust account?
In Australia, family trusts are established by trustees: in this instance, parents. The trustees can fill their family trust with profit from their family business, and the trust will then distribute that income to its beneficiaries: the children, grandchildren and their spouses. The trustees determine the value of the distribution each beneficiary receives.
How a family trust works
Much like a company structure, a family trust prepares a set of annual financials and lodges a regular trust tax return.
-Profit is calculated at the end of the financial year (income minus expenses plus the previous year’s losses) and then distributed to the beneficiaries.
- Distributions received from a trust form part of the beneficiary's assessable income. If the beneficiary receives income from other sources, all their income is taxed together.
The trust doesn’t pay tax, so beneficiaries are taxed on the amount of income placed in their name. If the business being run via the trust generates more than $75,000 of income in a financial year, then the trust is required to register for GST.
Why establish a family trust?
There are three key reasons why you should set up a family trust:
1. Your family business is growing
2. You have new business opportunities
3. You need to structure your investments properly
An example of why you should set up a family trust
Instead, you could place your profits within a family trust to lower your tax obligation. Then, you can have the trust distribute a portion of the profits to you and the other beneficiaries.
Except in certain specific circumstances, the trust does not pay tax. Rather, the beneficiaries are taxed at their personal tax rates, which are likely lower than the corporate tax rate you would have otherwise paid.
In this example, if each beneficiary receives $66,600 from the trust, the combined total tax owed would be around $40,000.
In the end, your family trust has saved you $27,000.
When should you set up a family trust?
- Profits are growing
- The business is expanding
- Your average tax rate is approaching 30%
In these instances, a family trust can help reduce your tax rate. A family trust can also act as a holding structure if you're making significant investments. It can protect those assets from financial and legal troubles and save you taxes along the way. However, entering into a family trust isn’t a simple decision. It requires careful thinking and planning for the future of your business and investments.
Let’s look at the pros and cons of a family trust in detail.
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