Individuals or companies in Australia can set up family trusts as an investment or trading vehicle. Setting up a family trust is usually driven by a new business opportunity, a growing business or a need to structure investments properly.
What is a family trust?
A family trust is a discretionary trust established by a person or company to hold assets for the benefit of others, usually the trustee’s children and other descendants. Whilst family trusts are an appealing investment structure, the set-up and administration can be complex, so it’s important to seek your accountant’s advice when setting up your trust.
Key parties to a family trust
A family trust consists of several key roles, including:
- Trustee — A person or company listed as the legal owner of the trust’s assets. The trustee is solely responsible for the trust and to the trust’s creditors. A trust may have more than one trustee.
- Beneficiaries — The people or companies who will benefit from the trust.
- Settlor — Provides the assets or monies to the trustee and signs the trust deed during the set-up stage of the trust.
- Appointor — Person who sets up the trust. The appointor is responsible for appointing or replacing trustees, but not the day-to-day control of the trust’s assets.
Should I set up a family trust?
Your accountant can provide more information on whether a family trust is right for you. Beyond Advisors may recommend setting up a family trust depending on your circumstances e.g.:
- You run your own business and profits are growing
- You’re making significant investments and need a holding structure
- You’re thinking of setting up a company to run your business and need to hold shares in a tax-effective structure.
Benefits of a family trust
There are several benefits to setting up a family trust, including:
- The trustee has absolute discretion when distributing the trust’s net income and capital gains to the beneficiaries; this may result in tax advantages depending on your situation.
- Asset protection
A family trust is a separate legal entity and provides a certain level of protection of personal assets if you face financial difficulty or legal action.
- Tax benefits
A family trust is a tax-effective structure to hold investments. Speak to Beyond Advisors for more information about family trusts and taxation.
- Low set-up costs
A trust deed governs the life of the family trust, usually 80 years, depending on where you live. Therefore, the set-up costs are low relative to the life of the trust.
- Estate planning
Through a family trust, the ownership of assets, such as shares or a holiday home, can continue uninterrupted even when a family member passes away.
- Manage assets during the life of someone with special needs
A family trust can provide financial support to someone who requires assistance, such as someone on an age or disability support pension.
Disadvantages of setting up a family trust
While a family trust offers many benefits, it may not suit all situations. Some of the disadvantages include:
- Loss of ownership of assets
When you establish your trust, you transfer ownership of your assets to the trustee. Often, this transaction will give rise to Capital Gains Tax (CGT) and possibly stamp duty and Goods and Services Tax (GST).
- Ongoing management
Once established, there will be time and financial costs associated with running the trust, including annual accounting and administrative requirements. Often people need an accountant to do this for them.
- A higher tax rate for undistributed income
If your trustee doesn’t structure the trust effectively and you end up with undistributed income, the trust will pay tax at a much higher marginal rate.
- Trust losses
If your trust assets run at a loss, you can’t subtract the losses from your taxable income.
- No access to government grants
Operating a family trust means your business likely can’t access many government grants and tax concessions, such as the Research & Development tax concession.
Family trusts and wills
A trust fund is different from a will and gives you control over the distribution of your assets; for example, if you die without making a will, your estate will be divided according to state law. However, if you set up a family trust, you can dictate how to distribute your assets after your death. You can also appoint someone other than yourself as trustee of your estate to avoid probate fees and delays in the distribution of your assets.
Family trust and the Australian Tax Office
The Australian Tax Office (ATO) has indicated concerns about family trust distributions being made to a lower-taxed beneficiary and then being lent or gifted to another member of the trust who would have been taxed at a higher rate.
Consequently, in February 2022, the ATO changed the way they will be taxing family trusts, these changes will limit:
- The ability to spread trust income across family members with a lower tax rate, and
- Unpaid trust distributions to companies, or circular arrangements whereby a trust distributes to a company, which in turn pays a dividend back to the trust, which then distributes back to the company.
The ATO recommends that trustees document the intention of any distributions, the use of trust funds, and how this interacts with ATO guidance. If you’re unclear of ATO expectations, seeking financial advice when setting up your family trust or distributing trust funds will ensure trustees and beneficiaries meet all requirements.
Beyond Advisors offers professional advice for businesses of all shapes and sizes. For assistance on family trusts, get in touch with our helpful team today.