Thinking you have outgrown your soletrader status? Looking to minimise your tax? Have you considered entering into a Family Trust structure?

The term family trust refers to a discretionary trust set up to hold a family’s assets or to conduct a family business. Generally, they are established for asset protection or tax purposes.

 

What is a Family Trust in Australia?

 

An Australian family trust:

  • is generally established by a family member for the benefit of members of the ‘family group’;
  • can be the subject of a family trust election which provides it with certain tax advantages, provided that the trust passes the family control test and makes distributions of trust income only to beneficiaries of the trust who are within the ‘family group’;
  • can assist in protecting the family group’s assets from the liabilities of one or more of the family members (for instance, in the event of a family member’s bankruptcy or insolvency);
  • provides a mechanism to pass family assets to future generations; and
  • can provide a means of accessing favourable taxation treatment by ensuring all family members use their income tax “tax-free thresholds”.

A family trust has many other potential benefits, including avoiding issues such as challenges to the will following a death of a senior member of the family.

Tax Implications

Companies are currently taxed at 28.5% from the first $.

Trusts on the other hand, are not taxed. Instead, the profits are distributed to beneficiaries of the trust and are then taxed at individual marginal tax rates – ie each beneficiary is entitled to the $18200 tax free threshold.

For example – a business ends the year with a 75000 profit –

Company – $75000 @ 28.5% = $21375

Trust with 3 beneficiaries – 75000/3 = $25000 is distributed to each beneficiary resulting in them paying $1292 each in tax – a saving of $17499 in tax.

Yes – this is a simplistic view of a basic trust – and yes – there are rules around taxing of minors etc – but it is definitely something to consider when your business starts to grow bigger and bigger.

 

Call Stellar Accounts today for advice and assistance on the best business structure to suit your needs.