Like the name suggests a Discretionary Trust has discretion as to where is distributes its income and capital. A family trust is essentially a relationship that is set out by a trust deed between a trustee and a beneficiary or beneficiaries.
The trustee is given the duty of holding property on behalf of the beneficiaries.
A Trust unlike other accounting and taxation entities separates the legal ownership of property and the beneficial (equitable) ownership.
The different roles / parties in a family trust include:
· The Settlor
· The Trustee
· The Appointor
· The Beneficiaries
· The Trust Fund
· The Trust Deed
Advantages
1. Flexible in the distributions of income and capital.
2. Asset protection can be achieved through appointment of a corporate trustee (XXX XXX Pty Ltd).
3. The trustee (usually the directors) have discretion as to where the income is distributed.
4. CGT discounts and other concessions are available.
5. Makes succession planning easier.
6. There is no superannuation payable on trust distributions.
7. There are no WorkSafe Premiums or Payroll Tax payable on trust distributions.
8. Unlike payments made from companies and individuals the is no commercial basis that needs to be applied.
Disadvantages
1. More expensive to setup.
2. The rules of the trust deed must be adhered to.
3. If the income is not distributed to a beneficiary then the trustee will be subject to the top marginal rate.
4. Losses can not be passed onto beneficiaries; they are carried forward in the trust.
5. An ‘interest’ or ‘share’ can not be sold, or transferred in a trust.
6. Beneficiaries will be taxed at marginal rates.
7. Not a separate legal entity.
8. Minutes and resolution need to be completed by the end of June; otherwise the trustee will be eligible for the tax at the top marginal rate.
There are two areas that trustees must consider:
1. Having trustee resolutions concerning allocation / entitlement of trust income in place prior to 30 June; and
2. The Australian Taxation Office (ATO) may consider a present entitlement / trust distribution not to be bono fide.
Concerning point 1 it is prudent to have your trustee resolutions in place and signed prior to the 30 June detailing the distribution of trust income. Refer – year end trustee resolutions
Concerning point 2 if the ATO were to consider the trust distribution to be as a result of a reimbursement agreement then in could be made void and the income could be assessed in the hands of the trustee at the top marginal rate. Refer to section 100A (1) Income Tax Assessment Act 1936 (ITAA 1936).
A reimbursement agreement is defined by any agreement or understanding providing for:
1. The payment of money (including a payment by way of loan) to
2. The transfer of property to, or
3. The provision of services or any other benefits for any person other than the beneficiary…
If you would like to discuss further please contact us:
McNamara and Co - Chartered Accountants, located minutes from the Melbourne CBD
www.mcnamaraandcompany.com.au/contact-us
Phone +61 3 9428 1062
Email admin@mcnamaraandco.com
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