Home Investment Setting Up a Family Trust Can Save You Lots

Setting Up a Family Trust Can Save You Lots

by dollarwise
Setting Up A Family Trust Can Save You Lots

Setting up a family trust could literally save you thousands a year, every year on your investment earnings. If you haven’t got one, you may be missing out. Read on and you can work out if it’s worth it for you, how much you can save and how to go about setting up your family trust. This has an Australian focus but I presume the same principles apply elsewhere in the world. But for starters…

What is a Family Trust?

A family trust is a legal arrangement in which a trustee/s (usually you and/or your spouse) looks after money in trust for certain beneficiaries (your family). You can designate a trust as either a normal discretionary trust in which anyone can be a beneficiary or if you elect them to be a family trust (by making a simple minute and ticking the box on your trust tax return), only family members can be a beneficiary of the trusts income. Family is a very broad term that includes everyone in your wider family. You can also distribute income to charities and religious bodies (eg churches).

Family trust cost between $100-$700 to set up (depending who you get to do it and which state you live in – NSW charge a $500 fee whereas most states like QLD charge nothing, see here for details). When setting up a family trust, either get your solicitor to fix you up or use cheaper online legal services.



Trust Documents Here at Law Central.

 

How Family Trusts Work?

Once you’ve finished setting up your family trust, go get an ABN and Tax File number for free from the Australian Business Register.  Now as the trustee you can open bank accounts, share trading accounts or even buy a house with your trust. You simply lend your money to the family trust for it to invest. As trustee you manage that money to earn income for the trust. At the end of the financial year you must pay out all income to your beneficiaries. If you don’t, the ATO will tax you at the highest marginal tax rate on anything you haven’t distributed (not a good idea). So along the way, or at the end of the financial year, make sure you distribute all the income, so it zero’s out by year end.

What are the Benefits of Setting up a Family Trust?

Profit Sharing

The biggest benefit of family trusts is the ability for you to distribute income made in the trust between family members. So let’s say you make $20 000 in income from your investments. You can now distribute that income in the way that makes the best financial sense. You may give $2 000 to charity and $18 000 to your spouse to keep them under the tax threshold if they aren’t earning income elsewhere. So on your $20 000 you can potentially get away without paying tax.

You can also distribute some money to your kids under 18. In Australia, the ATO puts a limit on this of $416/child . You don’t even have to give the money to the kids, you just make a minute noting that payments made on their behalf for their benefit total above $416 (which of course they do!) and send the money to yourself. That’s all money the tax department can’t touch. It also maximizes family tax benefits by keeping your taxable income lower.

You can also give to any other family members as well, just keep in mind they have to list it as income in their personal tax returns. As circumstances change over time, each year you can decide which is the best and most financially wise way of distributing the money. This flexibility for investment income to be distributed in whatever way you want each year is by far the greatest benefit.

Passing on franking credits and capital gains for tax purposes

Let’s say you make money off of shares. You get your dividend and franking credits. The great thing about a family trust is that you can separate the dividend and the franking credits. So you could give the dividend to one family member and the franking credits to another, if you so desired. You could give away your dividend to charity while keeping the franking credits yourself. Whatever maximizes the tax benefits in the most beneficial way. Likewise you can designate who receives any capital gains and claims the 50% capital gains tax reduction if you’ve held those assets for more than 12 months. However, you can’t pass on capital losses, losses are only allowed to be counted against future capital gains the trust makes.

Giving to Churches

If you are part of a church you might gladly give 10% or more of your income to your local church or other ministries. That’s a large sum of money that is not tax deductible like giving to charities, in Australia, atleast. This is where the family trust is of real benefit. Now you can give the trust income, dividend income, etc to your church. This money is now no longer taxable income for you. Effectively, you’re giving is now tax deductible/tax free. Moreover, this money is no longer counted against you for family tax benefit payments, etc. That makes a big difference to your bottom line at the end of the year and means you have more to invest, more to give and more to save. A win for everybody, except the government (for whom I feel very sorrowful!)

Should You Consider Setting Up a Family Trust?

Now there’s no point you getting a family trust if you don’t have any money to invest. You have to have cash on the side. I think to make the savings worth it, you would want $20 000 or more to cover the set up cost, more in NSW. You will also maximize the benefits if you have a family, the bigger the better, so not really for singles (unless you give to a local church – this is the most tax beneficial way to give to a church no matter your marital status). So this is not for everyone.

What are the Downsides of Setting Up a Family Trust?

Set Up Costs

It has to be worth it to cover the initial setup costs. I calculated it took me way less than a year to cover this cost for my circumstances, yours are different. Do your math and work out what you will save. If it does make sense, make sure you are prepared to keep up with the admin.

Tax returns and Administrative Upkeep

You have to fill out a trust tax return, on paper, at the end of each year. You can download the form from the the tax department. It’s a pain the first time, but not that hard to do once you’ve followed the instructions. Now you could pay your accountant to do it, but it’s so simple that it’s not worth the cost.  Just do it yourself. You also need to keep your book work up to date, so you know exactly how much to distribute. This is a good thing to do anyway, so you know exactly how much you are making. It does suck a bit of time every now and then though. So be prepared to keep up a spreadsheet with your dividend income, interest income, share purchases/sales, capital gains, etc. But that little bit of work can make a big difference over time.

Potential Savings With a Family Trust.

Here’s how setting up a family trust can save you lots. The following calculations are based on about a $250 000 investment earning dividends, franking credits and some cash in high interest accounts. I’m using what we’ve done as an example.

Scenario 1 : Distributing to Church and Kids – $4142.32/year saved.

  • Distribute $416 per child. We have 4 children, so that’s $1664 that isn’t taxed at 32.5c/$. $1164 x 0.325 = $378.30 saved.
  • Distribute dividend income of about $7500 to church and other christian ministries. If I had earned that money in our joint account it would have have been taxed at 32.5c for me and 19c for my partner. (0.325 x $7500)/2 + (0.19 x $7500)/2 =  $1931.25 less tax paid.
  • Maintain higher family benefits as that $9164 is not added to my income and reducing our payments by 0.2c/$.  $9164 x0.2 =$1832.8 saved.
  • I also pay less in HECS debt repayments.
  • I distribute franking credits to the lowest income earner, to pay the least tax and get the most back.
  • Lastly, give any remaining money to the lowest income so it’s taxed at 19c and not 32.5c.
  • Total saved = $4142.35. 

Scenario 2: No kids or churches or charities, distributing solely to the lowest income earner – $1237 saved per year. 

  • Paying the full $9164 to the lowest income earner will be taxed at 19c instead of 32.5c. Total saved 9164 x 0.135=  $1237.

Depending on your circumstances, what you give to, how much you have to invest, what the lower income earner makes, etc will change the variables and the amount you are able to save. But most people with money to invest will be better off with a family trust than without one over time. So why not get going with setting up a family trust and start saving. Let up know if you have any troubles or need any questions answered.

 

57 comments

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57 comments

Mrs. ETT September 8, 2016 - 5:28 am

Thanks Luke. Doesn’t look like it would suit us at this point (DINKs with relatively equal income), but it is worth knowing about, because who knows what we might decide to do in the future for extended family. I appreciate your analysis of savings too.

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Dividends Down Under September 8, 2016 - 12:15 pm

They’re particularly beneficial for people with children over 18, but who aren’t earning much. As they have the $18,200 tax free amount (with the low income offset you could go to about $20,500) you could give them many thousands of dollars up to their tax free amount. Or if both parents are earning $37K+ you could give them up to $37K and it’d still be beneficial.

Tristan

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Sagacious Steve September 8, 2016 - 6:48 pm

Thanks for the post it’s very informative.

Where do you think the sweet spot is for starting a Trust is? For SMSF $200k seems to be the figure bandied around.

Also what’s the process of transfering existing assets into a Trust? As not everyone will have had a trust from day 1 with thier assets? Can it be simple or is it effectively selling the items to the Trust?

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dollarwise September 9, 2016 - 9:43 am

The sweet spot depends on your personal circumstances. For me from $20k made a lot of sense. They are pretty cheap to set up really. $90 for the link in my article, plus any state dues, if any. At that price it isn’t like setting up a SMSF. So you don’t need a huge amount of capital. Can you transfer assets? Yes you can, but it still involves CGT and it’s a lot of hassle, so no point really. You’re better off just setting it up and transferring cash into it over time as you say sell some shares, etc. Then invest through the trust as trustee in assets. I wouldn’t be transferring any assets into it other than cash and going from there.

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jay September 9, 2016 - 12:17 pm

Hi Luke, thanks for this post. It was a real eye opener.

I read elsewhere that trusts can have ongoing maintenance fees, which was the main deterrent to me opening one. Can you shed any light on that?

It’s also nice to stumble onto a personal finance blog run by a Christian, let alone one in Australia. You are quite the rare breed!

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dollarwise September 9, 2016 - 2:05 pm

Jay, thanks for commenting. A trust could have ongoing maintenance fees if you employ an accountant and bookkeeper. Or you do it yourself at no cost at all. For a simple family trust you can do it all yourself. As I mentioned you need to keep your own books, money in, money earn’t, money out (and to whom). I use a simple excel spreadsheet for this – it does need to be accurate. You need to remember that money held in the trust must be treated separately to your money held in your personal accounts. Every transaction into the trust should be noted. I have one account that all money goes into and out of to make this easy. Other accounts and trading accounts earn stuff, but anything earn’t ends up in the one account before going out. So it’s all there. At the end of the financial year you need to make sure that you distribute all the income, so money earn’t=money out. You then fill in a trust tax return. That can be a bit confusing the first time and I had to call the ATO a couple of times to sort it out. If you go down that road I would be happy to help you too. Once you’ve done it once, it’s copy and paste for 90% of it, just adding the new numbers for the new year. Takes no time at all now. You do have to put down the TFN of each person or entity you distribute income to, so you may need to get that info off say a Church. Don’t be scared off. Sounds like you might be a Christian, this is a great way to give more! Make sure to subscribe if you haven’t already. Blessings. Luke.

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Jay September 13, 2016 - 3:45 pm

Thanks Luke, I’d be keen to continue the conversation privately, but you don’t have contact details on this site. Let me know if you prefer email or PM over Twitter/Facebook.

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dollarwise September 13, 2016 - 4:03 pm

No worries Jay, I’ve sent you my email address. Cheers Luke.

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Sagacious Steve September 11, 2016 - 7:26 am

Another couple quick questions:
I had a look at the ATO form, and some of it looks a bit daunting. I’m sure I’ll get over that. There is a Tax Agent section at the bottom. How does that work if you’re filling it in yourself?

How are you making your payments to churches etc? it seems a little contrary to the idea of a family trust being only for family members, do you have any other links or info on how that is possible?

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dollarwise September 11, 2016 - 4:03 pm

Steve,
Just leave the tax agent part blank, you don’t need a tax agent.
As long as the trust deed says that churches may be beneficiaries, you can give to churches. I’ve got a fairly general trust deed and it definitely list churches as beneficiaries. You would want to confirm that this is included though.
Here’s an exert from clear docs faq:This is under the family trust faq section.

Does the Cleardocs Discretionary Trust deed allow for a church as a beneficiary?
The Cleardocs Discretionary Trust deed allows for distributions to churches as eligible beneficiaries:

if the church is a charity; or
if the church is a legal entity and the trustee exercises its power to nominate the church as a beneficiary of the trust (for the purpose of receiving distributions).
If you have an existing discretionary trust, then the trustee may exercise its power to nominate a church or churches as an additional class of eligible beneficiaries. The trustee should first seek legal advice on potential resettlement issues before exercising the power.

If you have not yet established the discretionary trust you may wish to add a church or churches as a class of eligible beneficiaries before executing the deed. Maddocks can provide you with a quote to prepare an appropriate amendment.

So yes churches can legally be names as beneficiaries and distributed funds. I simply do an internet bank transfer and write as ref: gift to such and such church. You then just tally the amount and put them as a beneficiary.

Let me walk you briefly through the trust tax return, page by page.
page 1, TFN, trust name, pastal address, easy.
page 2, names of trustees, write the year of family trust election (there’s a form from the ATO to print off to do this), for me that’s 2013, a new trust would be 2016 (make sure to fill in ATO form). Is tax payable by the trustee, NO (as you distribute all income). final tax return? no. not a managed investment trust, skip. Put down EFT info of trust bank account. Describe business activty: INVESTMENT. industry Code: 62400. Status of business B3 Commenced business. Did you sell any goods or services? NO. Skip page 3 not a business per se.
page 4. If you have other trusts you may distribute to this trust, this info would go in section 8, but presume you won’t so skip. section 9 rent if you use the trust to buy property, or skip all $0 11. interest, put down how much interest the trust earned. 12. dividends, put down how much in dividends was earned and franking credits.
page 5 13. total income in item 15. 16-19 deductions. eg. housing if in invested there, otherwise likely nothing. 20. total income minus deductions. 21. write any capital gains or capital losses for the year. Do you have an exemption? No
page 6. 22-23 write in foreign income if you made money on overseas investments. 24,26 write in totals. 27. if you made a capital loss you can write down that you will carry it forward for future tax years. 29 all NO’s.
page 7. 30 NO. 31, NO. 32-35 write how much the trust owns in assets and liabilities. These should zero out. Eg. Trust owns 250000, Trust owes trustees 250000.
page 8-9 skip, not a business.
page 10ff write down each beneficiary, churches are entity code C, assessment calculation code for churches V: 13, write in TFN if they have one, address, at W total share on income, eg. 7500. If interest/dividends put at B non primary production, if capital gains at F, in Franking credits D, foreign income G, etc. Should add up to total put at W. TB statement? NO. TFN amounts withheld $0. For other beneficiaries, repeat process. YOu can search assessment codes etc for anything different online through the trust tax return guide, help section.
page 15 54 nothing if you distribute all income. 55. nothing, leave blank. 56 no, 57, No.
last page. sign. Leave tax agent section blank.
Done.
Again once you’ve done this once or twice you basically copy form last year with new numbers.
Cheers
Luke.

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Sagacious Steve September 11, 2016 - 7:03 pm

ThankLuke, that was really helpful.

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Eugene August 6, 2018 - 5:33 pm

Hi Luke,
I’ve got a question about the items 32-35. Are you sure that “These should zero out. Eg. Trust owns 250000, Trust owes trustees 250000.”?
My understanding is that whatever trust owns (maybe except for the loans) is trust’s assets which the trust does not owes to anybody.

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dollarwise August 26, 2018 - 7:57 am

It probably depends how you set up the trust. Whether the money in the trust is gifted or loaned and at what rate. The trust could borrow from the bank or a trustee, those are liabilities. If the money is gifted as is often the case, then the trust has the assets.

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Jeff June 20, 2019 - 11:01 pm

I don’t understand why you would donate to churches. Yes you will pay less tax but for a $7500 donation you are saving $1931 in tax. So yes an effective way to donate if you already intended to but still leaves you over $5500 out of pocket – Am I missing something ?

It’s like people saying spend all your money as it saves you on tax – it might but you still end up with less money in the end.

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Rudy SMT September 17, 2016 - 3:53 am

Hi Luke,

Cool article!

I’m going to check out if Italy has something similar.

Nice website design too 🙂

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Patrick September 27, 2016 - 11:22 am

I’m looking into setting up a discretionary trust/family trust, but using a corporate trustee who is also a beneficiary in order to secure the 30% tax rate on the dividends. Do you have any advice about doing that?

Also the costs will exceed the tax savings for the next few years or so but I don’t want to purchase shares, then set up a discretionary trust later and have to pay the capital gains tax. Do you think this reasoning is flawed or actually smart? haha

Great article!

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dollarwise October 5, 2016 - 12:59 pm

With a corporate trustee you can’t claim the 50% CGT reduction or pass on franking credits, so probably not the best for averaged sized share investments. Also a corporate trustee has more upkeep in terms of dollars. You have to pay for your yearly company registration with ASIC and comply with reporting requirements for companies. So more paperwork. Having a company trustee makes sense for two reasons, 1. protection of assets 2. Having sufficient earnings from a business such that the 30% tax rate is more tax effective than personal tax rates. Especially when you want to invest earnings back into business assets. I’ve had a corporate trustee of a trust, but do share trading through the family trust. Leave it with you. It in doubt, talk to your accountant.

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Chris October 2, 2016 - 8:06 pm

Hi Luke, thanks for the great article! I was wondering – when you distribute income from the trust, does that mean you are physically distributing money out of the trust (e.g. pay cash into your child’s bank account) or can you distribute money on paper and keep the funds within the trust to be reinvested immediately?

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dollarwise October 5, 2016 - 12:49 pm

I’m not 100% on this so you might want to talk to an accountant. I’ve tended to make a physical transaction to make things clear. But I imagine some things could be done on paper, provided you have minuted it and rightly accounted for it on paper. For example, let’s say you reinvest dividends but say they have been distributed. You would minute the distribution to say yourself for the dividend and franking credits, list the distribution and then in your accounts reinvest the same amount as a loan from you to the trust. Again, I presume this could be done, but I’d ask an accountant to be sure or phone the ATO. Otherwise, to be safe it’s not that burdensome to make the two transactions.

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Chris October 5, 2016 - 1:34 pm

Thanks Luke, that makes sense, I’ll definitely ask an accountant when I get the chance.

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dollarwise October 6, 2016 - 6:16 pm

glad to help

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Fe October 26, 2017 - 12:00 pm

With family trust, does this also cover asset protection? Does this attract stamp duty and do you need to change your name in the title? Thanks

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dollarwise November 17, 2017 - 8:59 pm

Fe, a family trust does provide some asset protection as the assets are held by the trust. Buying an asset with a trust does involve costs such as stamp duty and does require a title change as the trust becomes the owner. So you can’t just transfer an asset, there are costs involved. Luke.

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Awan February 16, 2018 - 7:06 am

Hi,
I have recently set up a new family trust on the advice of my account. However, I have decided put it on hold for some time. Is it possible to set up a family trust and to use it at some later stage when required or I have to do bookkeeping and keep it runni regardless of funds transferred in or out?

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dollarwise February 17, 2018 - 1:26 pm

You do need to put in a trust tax return each year, even if there is $0 earned and distributed. It takes about 15min if everything is $0, but probably 2 hours the first time to work it all out. You can download the form from the tax office, just search for trust tax return. There’s an info booklet to help you answer the questions. If you get stuck, let us know, I do this every year for two trusts and it’s really quick now.

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Jeremy March 6, 2018 - 3:12 pm

Hey Luke,

Thanks for the article, very useful especially in regards to giving to churches.

Been thinking about setting one up for a while but the regularly quoted $2,500 cost to set one up was prohibitive. Now I know it can be set up far cheaper makes it more palatable!

Regards
Another Melbourne-based Christian

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SY August 22, 2018 - 1:56 pm

Hi,
Just came across this article, thanks very much Luke, it’s very helpful. Can i pm you separately to share our circumstances and discuss if it’s worthwhile for us to set up a trust?

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dollarwise August 26, 2018 - 7:54 am Reply
Christine Sidney August 24, 2018 - 6:54 pm

Hi Luke

I am a shareholder of a business which the shares are valued at A$142,000
i was thinking to open up a family trust for my 15 year old son, with my husband as beneficiary and gift my son the shares
this is because of a restraint for me being a shareholder.
would this work ?
obviously I need to also speak to my accountant about this and the costs for both me gifting them to him and him receiving them
thanks Chris

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Jay September 12, 2018 - 3:04 pm

I finally got around to setting up a trust. When gifting money to the trust, do I need to send it to the trust’s bank account first before sending it to its brokerage account?

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dollarwise September 12, 2018 - 4:44 pm

Jay,
You just want to make sure you keep track of money in, out, interest earned, costs, etc. You can send it straight to a brokerage account in the trusts name. Just keep an excel spreadsheet updated with what you have gifted. I tend to go via a main account myself, just to know that everything in and out comes through that one account. I find then I can easily download a years transactions and know that it captures everything coming in and all outgoing distributions or capital returns. So it’s more about good accounting records than which account it goes into.

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Michael October 8, 2018 - 7:31 pm

Luke, it seems that the ATO has disallowed separate streaming of franking credits and dividends following the Thomas Case. Do you agree?

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dollarwise October 12, 2018 - 3:19 pm

It appears that the case prevents the distributing of franking credits to one person, while giving the attached dividend to another. That is dividends and their attached franking credits are joined and must be given together. Provided that your trust deed allows, you can still distribute dividends with their attached franking credits to a family member of a family trust and they can apply the franking credit. But they must also receive the income from the attached dividend on which they will be taxed. That is my reading of it. It also appears that the language of the distribution minute and the wording of your trust deed is important to allow the streaming of dividends.

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Tony November 17, 2018 - 6:39 am

Hi Luke – great article! I’m in the process of setting up a family trust. How do I go about getting it stamped/registered? I’m based in Victoria.

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sağlık February 4, 2019 - 11:29 am

Nice post. I learn something totally new and challenging on sites I stumbleupon every day.
It’s always interesting to read content from other writers and use something from their websites.

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garry April 16, 2019 - 10:16 am

Hi, Can a discretionary family trust lend money to a beneficiary at 0% interest , this would be for the purpose of buying a home and against a mortgage on the property. This would be done to protect the capital in case of divorce or other legal action.

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dollarwise April 30, 2019 - 2:37 pm

I don’t think so. I think you have to charge interest. But I’d talk to an accountant for advice.

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Brad Biren May 7, 2019 - 3:35 pm

Hi Luke,
My question is about transferring current property into a family trust. Is this costly? Do you have any idea of the steps to take.
Reagrds
Brad

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dollarwise May 7, 2019 - 7:43 pm

Brad, it’s certainly possible to do but you need to talk with your solicitor and accountant. When you transfer property into a trust in triggers CGT on the persons transferring the asset. The trust is also liable to pay stamp duty on the acquisition of the property. I presume all of this would need to be done at market price via a valuation. For these reasons you need to do your numbers and talk with an accountant about the long term benefits and reasons for doing so to make sure it is sound. A Solicitor could help with all the paperwork for transferring ownership and there are obviously costs associated with all that.

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Tim September 13, 2019 - 8:27 am

Hi Luke, this has to be one of the most useful Australian post I have seen in relation to family discretionary trusts for DIY’er, and I have trawled the internet looking for information. I like how you explain it in simple terms. What I found extremely useful was your response to a comment that included a step by step guide on completing the trust tax return. Absolutely brilliant!

I have sent you a PM in relation to questions when a trust has an investment property, which is slightly different to the example you provided where the trust held shares.

Many thanks, Tim
Subscribed!

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Ferdi September 18, 2019 - 3:23 pm

Hi Luke,
Best article on the topic that I found – everyone else is trying to sell something. Thanks. I want to set up a trust and have a couple of questions:
1. I have been told by an accountant that you can only redistribute income from investments not from the income that I earn as an employee of a company – Is there anything that I can legally do here?
2. I will be acquiring shares in a company and have obviously been recommended to do that via a trust – I have also been advised to set up a company as the trustee with ownership shared 50/50 between myself and my wife so that if something happens to me, and a creditor takes over my 50%, my wife will be able to vote against whatever the creditor wants to do and so doing protect the ownership.
Do you have any advise regarding this?
Thanks

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dollarwise September 19, 2019 - 9:16 am

Ferdi,
You can redistribute profits and earnings of the trust ONLY, not personal income/wages. If you run a business through the trust you can distribute the profit of the business. There is no way wages can be used, only income from the investments and activities of the trust. As for point 2, the safest way to protect assets is via a trust with a company trustee. Your advisor is right on the money with their advice. There are additional costs with maintaining a company (a few hundred dollars a year if you do your own tax, a lot more if you use an accountant) and so you need to decide on the likelyhood of being sued, bankrupted, etc. If the likelihood is very, very low, it may not be worth the added expense. I do this as I run a business that could be sued in the trust. I want to protect our personal assets against this outcome and the small cost compared to the earnings in my business makes it a no brainer. So figure out how much you earn through it, the liklihood of being sued and make the best decision. You can always change it if circumstances change in the future, it will cost $600-$1200 or so to change the trustee and set up a company if you wanted to amend the trust deed down the track.

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Ferdi September 20, 2019 - 9:06 am

Thanks Luke,

Appreciate the feedback and advice.

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Ferdi Retief September 21, 2019 - 1:46 pm

Hi Luke,
Follow up questions….
You say that you run a business “through” the trust at the moment. Does this mean that your trust owns the shares in the business or is there another case here?
Re the corporate trustee – If for example, I was to start up a new business and have the trust own the shares, then I would imagine that the safest thing to do is to have a corporate trustee as any new business is a bit risky. Otherwise if just aquiring shares in an existing business, then a corporate trustee is less creitical?
Appreciate your response

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dollarwise September 24, 2019 - 3:53 pm

Ferdi,
When I say I run the business through the trust, what i mean is the trust has an ABN and my business name is registered to that ABN. The profit from that business is distributed to beneficiaries at the end of each tax year (usually my family). The trust has a corporate trustee but I only have $1 associated with that company. Trusts can own shares (assets) but you wouldn’t have a trust owning the shares of the same company that is the trustee of the trust. My wife and I are shareholders and directors of the company that is the trustee of our trust. So why do this?. If the business is sued or goes under for example, there will only be a small amount of money in the business and the company trustee only has $1 that it can pay. Remember, that the trustee is the responsible entity for the trust/business and is the one that is sued/liable for damages/repayments/etc. The aim is to protect my family home and assets which grows as the trust distributes more and more income to it’s beneficiaries (eg. my family). In this way my family assets cannot be gained by any action against my business/trust for which the corporate trustee is responsible. The other options is to be a sole trader in which case all my personal and family assets are liable. You can also run a business through a company directly which also has more financial protection, but liability can still fall on directors for negligence, etc. There is also insurance options for liability protection as well.

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Happy January 22, 2020 - 1:13 pm

Hi, I would like to ask how to protect a business income that I am planning to start. I would like to protect it from my husband because he mishandles his own income and he makes frequent loans. I would like your advice. I don’t know how I should set it up the right way.
I was thinking of setting up a company for my small business and get its own company tax file number and file company income tax to ATO. I will register myself as “managing director employee” in this company, receive wages, and file personal income tax to ATO. My questions are:
1. When my husband fills up his personal income tax form, he needs to put in there the income of his spouse. I know I will need to inform him of my personal income but do I need to inform him of the company’s income too even if it has its own file number?
2. Do I also need to include the company income in my personal income tax form?

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dollarwise February 20, 2020 - 3:04 pm

Happy,
You can keep the company separate from your personal tax. As you said, you can be the director of the company and be paid a wage, directors fees or dividends. You are only taxed and you only report on income you receive from the company in one of these ways. The company though is an asset you will manage as director and probably own as a shareholder. So it is an asset you own. Be aware though that centrelink etc see things differently and will likely assess your company income regarding payments, child support, etc. Also you still own the retained income that you convert to an asset in the company like you have cash in the bank that you own.

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Happy January 22, 2020 - 1:15 pm

(Continuation in earlier post)
I was also planning to open a Trust, and put the company and myself under this trust, where I am the only beneficiary of the trust. I am not familiar how trust works.
Questions:
* Can I transfer the company income and my personal income to the Trust on a regular basis, to save enough money to buy a residential apartment in Australia? Can I use Trust to own and buy a residential apartment?
* Can I use Trust to own and buy an investment property too? Or, should I open another company to buy the investment properties, and put this company under the Trust as well.

Hope to get clarity and guidance. Thank you

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dollarwise February 20, 2020 - 3:11 pm

Happy,
Either you personally or a company you direct can be the trustee of a trust. The safest option is the company one, as you are personally more steps away. This is more costly though to keep a company running.
You can loan or gift after tax money to the trust. The trust can own and invest in property. But be aware that a bank is less likely to loan to a trust than an individual, unless you have sufficient capital or sufficient earnings history to justify a loan.
Companies don’t sit under a trust. Trusts and companies are two different business structures. Trusts have to distribute all earnings at the end of the year but can retain assets, where as a company can retain earnings after paying the company tax rate. THey are different structures, both of which can run a business. Companies can be the trustee of a trust though and administer the trust as trustee. But earning still have to be given to beneficiaries, one of which could be your company. Maybe chat with a solicitor to clarify before you take steps.

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Li February 20, 2020 - 11:42 am

Luke, you are brilliant. I have pinned this website. I am copying and pasting one of your responses because I have some queries.
“The sweet spot depends on your personal circumstances. For me from $20k made a lot of sense. They are pretty cheap to set up really. $90 for the link in my article, plus any state dues, if any. At that price it isn’t like setting up a SMSF. So you don’t need a huge amount of capital. Can you transfer assets? Yes you can, but it still involves CGT and it’s a lot of hassle, so no point really. You’re better off just setting it up and transferring cash into it over time as you say sell some shares, etc. Then invest through the trust as trustee in assets. I wouldn’t be transferring any assets into it other than cash and going from there.”
Q1: I can not find the link to set up the trust for $90.
Q2: You said you would only put cash into trust account. Would you invest the cash in the trust account into managed fund (since interest rate is so low now?
Q3: can I choose any state when setting up the trust?
Q4: You mentioned that the tax rate for trust income is 45% if it is not distributed. What if you distribute it to a beneficiary (whose tax rate is around 30%) first prior to reinvesting the money into the trust?

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dollarwise February 20, 2020 - 3:14 pm

Do a quick google search and you will find plenty of online law agents to set you up a trust. Yes I would invest cash in the trust in some way, most likely shares/managed funds/ ETF’s or the like with a long term outlook. You set it up in the state your trust’s registered address is at, usually the trustee’s address. Yes you should distribute income to a beneficiery, pay tax and then gift/loan to the trust if desired. This is exactly what you would do.

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Jayne February 21, 2020 - 5:17 pm

Hey Luke
Firstly – thank you – your column has given me a raft of solutions to issues and all in a matter of fact, easy to understand language that does not leave me thinking you are trying to sell me something.
Secondly – do you lodge your trust tax returns on October 31? I notice that the ATO requires this, we have previously used accountants so will be late if I do it myself, though I have always found the ATO to be extremely helpful I am under the impression that if you use an accountant you get more time to lodge; and am wondering if it makes more sense monetarily to use an accountant this time then do it myself next time.
Finally – are you as savvy with SMSF as you are with Trusts? If so do you have a similar advice column on those that I can refer to?

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dollarwise February 24, 2020 - 9:44 am

Jayne,
Yes you lodge tax returns by Oct 31 and yes accountants can usually get an extension to April at least. The ATO will probably be glad you’ve got one in, I’d just call them. You could certainly get an accountant to quote you on cost. I’ve found they charge a lot more for trusts than personal tax returns, even when they are quite simple. Unfortunately I’m not as informed around SMSF as I haven’t personally used them or researched them sufficiently. Luke.

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Punch March 1, 2020 - 9:21 am

Hi,
If you lent funds to the trustee, did you have a formal loan agreement? How did you go about getting this done?
Thanks

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dollarwise April 6, 2020 - 7:44 am

If you loan instead of invest or gift, you want to draw up a formal loan agreement with the parties, terms, repayment plan and what happens if it defaults, etc.

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Punch March 1, 2020 - 9:23 am

Oh, and one other question, are the setup costs deductible? Do they need to be paid from the trustee’s ATF account or personal account okay, but then recorded?

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dollarwise April 6, 2020 - 7:46 am

setup costs are deductible against the earnings in the financial year they occur. Be aware some costs are depreciated, like equipment/software. Others like account fees etc are expenses. That said the instant asset writeoff usually means you can write off all small setup costs entirely.

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