Saving on taxes is a goal for many, but often, people go about it the wrong way. While tax deductions have their limits, investing in a family trust with the right tax structure can lead to unlimited tax savings
At Endurego Tax, we aim to help you understand how to maximize these savings. One powerful tool in tax planning is the family trust, or discretionary trust, which offers remarkable flexibility and potential savings.
Understanding Family Trust
A family trust is a tax entity that allows you to manage and distribute investment income in a way that minimizes your tax liability. When you set up a trust, you can open investment accounts, save, and even purchase property under the trust. The income generated from these investments is then distributed to beneficiaries, who pay the tax on it.
Beneficiaries can be family members, such as a partner or children, or even a private Pty Ltd company. Using a private investment company as a beneficiary is particularly advantageous due to its flat tax rate of 30%, compared to individual marginal rates that can go up to 47%.
The Power of Private Investment Companies
Most are familiar with companies running businesses, but private investment companies exist solely for investing. Their flat 30% tax rate can significantly reduce your tax burden when they act as beneficiaries of a family trust. This setup allows for substantial tax savings, especially when the investment income isn’t needed immediately.
Practical Example
Consider a family trust generating $100,000 annually. Here’s a simplified breakdown of potential tax rates for different beneficiaries:
- Mum earning $145k: 37%
- Dad earning $25k: 18%
- 13-year-old daughter with no income: 47%
- 18-year-old daughter earning $8k: 0%
- Private company: 30%
In this scenario, distributing income wisely can lead to significant tax savings. For instance, distributing some income to an older child and some to a lower-earning parent can save $5,637 in a year. Additionally, using an investment company to receive distributions can save up to $17,000 annually compared to top marginal tax rates.
Costs vs. Benefits
While setting up and running a trust involves costs, the benefits often outweigh them, especially in the long term. It’s crucial to assess your situation and seek professional advice to ensure a trust is the right move for you.
The Bottom Line
Family trust can be a highly effective way to reduce tax on investment income, particularly if you have fluctuating income or children who will eventually benefit from income distributions. Trusts aren’t suitable for everyone, but for those in the right circumstances, they offer substantial tax savings.
At Endurego Tax, we’re here to help you navigate these options. If you think a family trust could benefit you, let’s explore how it fits into your financial plan. Contact us today to start optimizing your tax strategy.
