While the ATO continues to crackdown on tax minimisation strategies, quite a few legal pathways to paying less tax while preserving wealth for retirement or estate planning purposes still exist.
Family trusts have significant tax saving abilities that make them an attractive tool for wealth creation. Family trusts are discretionary trusts that set up to hold a family’s assets or run a family business. They are commonly used by families where there is a high income earner, a low income earning spouse and children studying full-time. The trust structure allows non-personal income from business and investments (income and capital) to be streamed to beneficiaries in lower tax brackets.
Streaming income allows trustees to place a high proportion of the trust’s earnings into the names of their spouse and children. Using the $18,200 tax-free threshold and lower marginal rates, family income can be minimised with franking credits offset and possibly refunded. However, if the children are below the age of 18, it may not be worthwhile to use this strategy since any investment income they earn above $416 attracts a much higher tax rate.
Those using family trusts for tax purposes may be able to take advantage of the tax-free thresholds by allocating investment income to younger members in the trust. Allocating a high proportion of capital gains and franking credits to low income earners can generate significant tax savings.
Family trusts can also be used for estate planning purposes since assets can be left to beneficiaries without the need to change ownership of those assets. Additionally, they may be used to protect a family’s group assets from the liabilities of one or more family members such as bankruptcy or insolvency. In most circumstances, the trust’s assets will not be at risk.
While family trusts can be a great option for minimising a family’s overall tax burden, they are complex entities. If you are considering establishing a trust, it is always best to seek professional advice.