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HOW DOES A FAMILY TRUST WORK IN AUSTRALIA?

HomeInformation Centre
How does a family trust work in Australia?

Tax Minimisation
By
Andrew Phelan
Partner & Consultant
August 29, 2022
6
minute read


YOUR TOTAL GUIDE TO UNDERSTANDING FAMILY TRUSTS - READ ON FOR A FREE
DOWNLOADABLE GUIDE!

Running a thriving business is every family business owner's dream. But as your
business grows, so do your tax obligations.

A family trust can be a suitable option for business owners looking to take
advantage of tax-effective planning.

Liston Newton Advisory provides advice and guidance for business owners looking
to set their businesses up for success. Read more about the taxation advice we
can offer.


WHAT IS A FAMILY TRUST?

As the name suggests, a family trust is a type of trust fund set up to conduct a
family business or hold your family's assets.


WHAT ARE THE TAX BENEFITS OF A TRUST?

There are several family trust tax advantages, which can be a solid tax
minimisation strategy. That's why it’s vital to know whether you’re eligible to
create one.


PROTECT COMPANY ASSETS

A key family trust tax benefit is that the fund owns all assets it gets
assigned. If you then nominate a company as the trustee, this effectively
shields those assets from liability and works to protect your family's assets.


PROTECT FAMILY INVESTMENTS

Another significant tax benefit of a family trust is that it can act as a
holding structure for your family investments, protecting them from legal or
financial liability.


CREATE A FAMILY INCOME

If you run a growing family business, a family trust can be a robust way to look
after your family and secure your assets. You can assign your family members as
beneficiaries of your business, allowing them to receive income and taxable
profits directly from the trust.


PROTECT YOUR CHILDREN’S INHERITANCE

While Australia does not levy an inheritance tax, a family trust can protect its
capital from capital gains and income taxes. This will allow you to distribute a
greater amount of your wealth to your children.




BOOK A FREE FINANCIAL STRATEGY SESSION

A 90-minute strategy session gives you a clear plan for your family trust.

 * Get a better understanding of your needs
 * We generate a detailed report from your strategy session
 * Understand your priorities and next steps

Book your strategy session



‍

There are two common types of family trust structures. This article focuses on
the discretionary trust structure.


FAMILY/DISCRETIONARY TRUST

This is the most flexible type of family trust structure and operates strictly
within a single family group. It's also known as a discretionary trust, as the
beneficiaries don't claim a fixed income. Instead, you can set different income
percentages for various beneficiaries, and these amounts can change from year to
year. Ultimately, it is the discretion of the trustee/s to distribute to the
relevant family members within their family group after proper tax planning from
their tax advisers/accountants. 

The tax benefit of discretionary trusts is that the trust does not pay taxes;
instead, the trust fund money received by the beneficiaries is taxed at each
beneficiary’s individually calculated (and usually lower) tax rate.

Please see below an example of a family trust structure with a corporate
trustee:



‍


UNIT/FIXED TRUST

Also known as a fixed trust, a unit trust operates slightly differently from a
discretionary trust. Within this structure, the profits are divided depending on
the fixed ownership percentages stipulated in the unit trust agreement when the
entity is set up. A unit trust allows for more than one family group to be
involved in the fund.

Below is an example of a unit trust structure with a corporate trustee:




TAX RATES FOR A FAMILY TRUST

A family trust typically pays zero tax on income from within the trust. Instead,
the income is distributed to the beneficiaries, who are taxed at their personal
tax rates. The trustee of the fund decides who within the family receives the
distributions. They are free to distribute the income to as many beneficiaries
as they see fit. However, you must always check your trust deed to ensure that
certain beneficiaries are included within its guidelines. 

Making the correct calculations when distributing the income proportions will
enable the family to take advantage of each beneficiaries' personal tax rates.
The only instance in which a family trust does pay tax is if the income isn't
distributed to its beneficiaries. In this case, the trust gets taxed at the
highest marginal tax rate (47%).


THE FAMILY TRUST CAPITAL GAINS TAX

Australian family trusts do pay capital gains tax (CGT). Fortunately, family
trusts benefit from a 50% CGT discount.

For example, if you were to sell your business or its assets, you would trigger
a CGT event in which a tax would be levied upon the profits of your sale.If you
operate as a company, you will need to pay CGT for all your capital gains. But
if you operate as a family trust, you will only be taxed on 50% of your capital
gains income.


EXAMPLE OF FAMILY TRUST TAX BENEFITS

A sole trader earns $200k profit from their business, and therefore they receive
all the income themselves. This results in an estimated $65k in tax payable to
the business owner.


Sole Trader

‍

But say the same business operates as a family trust, using the example of a mum
and dad business with an adult child working in the business. The business
owner/s can now split their income among their family members instead of it
being taxed in one person's name. If split equally, each family member would
receive approximately $66.6k each. As each family member is taxed at their
individual tax rates on this distribution, the combined tax payable would reduce
to approximately $40k in total. This is a tax saving of $27k every year.

‍


Family Trust

‍


CAN FAMILY TRUST FUNDS BE TAXED?

In Australian family trust structures, taxes are usually levied upon the trust's
beneficiaries. In certain instances, however, the government can impose a tax on
the trustee or the family trust itself.


THE NON-RESIDENT BENEFICIARY TAX

The trustee is liable to pay the taxes of any beneficiary who is not an
Australian resident for tax purposes. 


THE MINOR BENEFICIARY TAX

While minors can be listed as family trust beneficiaries, this tax discourages
the practice. Beneficiaries under 18 can receive a maximum of $1,308 from the
trust; any gain higher than that is taxed at the top marginal rate of 45%. 


THE UNDISTRIBUTED TRUST INCOME TAX

All income in the family trust must be distributed to the nominated
beneficiaries. If it is not, the trustee will be liable to pay a tax on the
remaining income at the top marginal tax rate of 45%.


THE FAMILY TRUST DISTRIBUTION TAX

A family trust distribution tax is placed on any individual outside the trust’s
listed beneficiaries.

Family trusts are set up to distribute capital to a nominated list of family
members. Suppose the trustee chooses to distribute money to a party not included
among the trust’s beneficiaries. In that case, the trustee will have to pay a
tax on the value of that distribution. This is called the family trust
distribution tax.

The family trust distribution tax rate is set at the top personal marginal tax
rate, plus the Medicare levy. At the time of writing, the family trust
distribution tax rate can amount to 47%.


SET UP COSTS FOR A FAMILY TRUST

When setting up a family trust, you can expect to pay between $1,500 and $2,500
+ GST.

This includes:

 * Creation of the trust deed.
 * Advice on who should be nominated as the trustee, appointor, and settlor.
 * Advice on who the beneficiaries should be.
 * Registration of its tax file number with the ATO.
 * Registration of an ABN and GST (if needed).
 * Collating of a bank account kit which allows you to simply have a new account
   set up for this entity upon its successful creation.


FRANKED DISTRIBUTIONS

As outlined by the ATO, franked distributions can be included in the family
trust's net income and distributed to its beneficiaries for tax purposes.

However, unlike regular business income, the allocations for these amounts must
be formally detailed in the trust deed. The trust deed can also prevent
beneficiaries from receiving franked distributions.

Where no beneficiary is appointed, the franked distribution is taxed
proportionately between the beneficiaries based on their usual entitlement to
the trust's income.

If the beneficiary qualifies for a franking credit offset, they're required to
include this amount in their assessable income.


DO FAMILY TRUSTS PAY LAND TAX?

Land held within fixed, discretionary or unit family trusts is subject to
surcharge rates. The trustees are liable to pay these rates. 

Each Australian state has its own laws regarding family trust land tax. They can
be a challenge to navigate, but your Liston Newton advisor can help you untangle
them. 


DOES A FAMILY TRUST FILE A TAX RETURN?

Trustees are required to lodge income tax returns for their family trusts and
are charged separately from their individual or corporate taxes.

If you’re looking for a structure that provides tax-effective planning and
improved asset protection for your family and business assets, then a family
trust might be right for you.


DOWNLOAD OUR GUIDE TO TAX-MINIMISATION

LEARN THE MOST EFFECTIVE TAX MINIMISIATION STRATEGIES THAT WE SHARE WITH OUR
CLIENTS TO CREATE FINANCIAL FREEDOM

Download it here.

‍

If you’re looking for a structure that provides for tax-effective planning, and
an improved level of protection for your family and business assets, then a
family trust might be for you.


FAMILY TRUSTS EXPLAINED: OUR FINAL WORD

Running a growing family business is exciting. However, without proper tax
planning, you could lose up to 49% of your business profits in tax. If you're
considering an effective way to minimise the tax payable on your business'
income, then a family trust might be right for your situation.

You also receive a level of comfort that your family assets are secure, and
you're creating a long-term structure that can set your family up for a
comfortable future.

If you're considering setting up a family trust, you'll find it worth it to
speak to our business accountants. Let's organise a virtual meet-up, or step
into our offices in Geelong, Mallee, Malvern, the Gold Coast, Port Macquarie or
Melbourne.


Our team at Liston Newton Advisory are family business experts. Read more about
how we can help make your business more tax-effective.

ABOUT

ANDREW PHELAN

Partner & Consultant

Andrew is always looking to help his clients achieve their best – not only in
business but in their personal lives, too. He is enthusiastic about the
profession, and his high-energy attitude makes an immediate and lasting
impression. He is extremely approachable and down to earth with all his clients.
He has a bachelor’s degree in Accounting and is an associate member of the
Certified Practicing Accountants (CPA) body.

Learn more


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