Nowadays, family trust has become a popular choice for families. To briefly introduce, trust is a fiduciary relationship where one person holds the legal title of the property for the benefit of another. A family trust is a type of trust established to hold a family’s assets or to conduct a family business for the benefit of family members. This structure has many advantages, such as asset protection, privacy, protection against family law claims, and flexibility. This article focuses on the function of tax reduction.
Normally, a family trust itself is not liable to pay tax, so the tax calculation of this income is different. The net income of the family trust estate is levied on the beneficiaries, or the trustee on their behalf. It is calculated based on the beneficiaries’ share of trust income when these beneficiaries are entitled to that income. In this way, the income from the family trust estate is split among the beneficiaries, and lower tax rates apply to each individual. In a discretionary trust, the tax can be further reduced by allocating more income to the beneficiary who has more tax deductions or losses to utilize their tax offsets.
Moreover, when the marginal tax rates of family members are still high even if the family trust is used, or if the distribution needs to be delayed to save tax, a “Bucket Company Arrangement” may be used to reduce the tax further. Under this arrangement, income will be distributed to a Bucket Company, and the Bucket Company will hold the income until it is distributed to its shareholders by way of future dividends.
Apart from them, if eligible, other tax concession still applies, such as 50% CGT concession and small business relief (e.g., 15-year exemption and retirement exemption). If the income is generated from shares in the trust assets, when distributing dividends to the beneficiaries, franking credits can also be used to reduce their tax liability further.
As above, family trust provides a flexible and tax-efficient way to manage and distribute family assets. It is a good choice for saving tax on your family assets and investments.
Disclaimer: This is intended as general information only and not to be construed as legal advice. The above information is subject to change. You should seek independent legal advice before embarking upon any course of action.
