Tax & Superannuation: Income - Guides
Income
10. Discretionary Trusts
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Last updated: 31 Jul 2015
- Family trusts can be useful for managing family wealth and can be a preferred way for a family group to hold income-earning assets.
- A family trust is usually a discretionary trust and is set up to own a family’s assets or to run a business.
- Investments in the family trust generate income and each year the income is distributed to family members.
- There are numerous advantages of setting up a discretionary trust including:
- it can be a tax effective method of managing family monies;
- different members of a family are often on different tax rates and income can be distributed each year according to the decision of the trustee;
- income of family members may be variable and holding assets earning income in the trust allows flexibility in the distribution of income between members of the family group from year to year;
- the trust can be in the business of investment allowing wealth to be created for the family group;
- trusts can be useful for asset protection;
- there is more flexibility than a self managed superfund;
- there are no contribution limits;
- there are no age restrictions on when you can put money into the trust or remove it;
- a trust is not subject to the investment restrictions of a superfund;
- a trust can be multigenerational; and
- it does not have to terminate in the same way as a superfund.
- Specific advice is recommended for trust structuring for asset protection as current developments in law relating to matrimonial assets and the aged pension tests require consideration.
- There are also many disadvantages associated with a discretionary trust including:
- rules in relation to the making of a family trust election and that once made the election is generally irrevocable;
- the operation of a trust can be difficult to understand and manage;
- losses remain in the trust to be used against future income in the trust. They cannot be offset against any family member’s personal income tax;
- if a family trust election is not made losses will be subject to the trust loss measures and subject to tests regarding availability;
- family trusts are not flexible in regards to distributions outside the family group and a family trust election has ongoing consequences;
- annual income tax returns for the trust must be filed each year;
- the trust must be administered to ensure there is present entitlement;
- annual distributions must be considered and made appropriately;
- income tax returns of beneficiaries need to reflect distributions made by the trust;
- the costs of administering the trust will depend on the complexity of the trust; and
- an investment portfolio of a reasonable size is recommended to justify the costs of administration. As a guide investment professionals sometimes suggest an investment portfolio of over $300,000 AUD or more.
- Like many areas of tax the use of family trusts for tax avoidance has been challenged by the ATO. For example there were amendments in 2011 governing how income can be distributed to children.
- Advice on the current status of the rules relating to family trusts and the appropriateness of this structure in your situation is recommended. Our free Find a Lawyer directory may help put you in touch with the assistance you need.
- For more information see our Equity and Trusts topic.
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