All Topics / Legal & Accounting / Saving tax through a trust

Viewing 20 posts - 1 through 20 (of 32 total)
  • Profile photo of kateej03kateej03
    Participant
    @kateej03
    Join Date: 2011
    Post Count: 112

    Hi Everyone,

    I am a bit confused at the moment! I'm trying to work out how I can save tax using a trust (not sure about the types of trusts). If the trust makes a large profit and is distributed to the beneficiaries and they are in the highest tax bracket, how does this help to save? Am I missing something?

    Is the trust able to hold the money and use it to purchase more property?

    Thanks,

    Kate

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    A discretionary (family) trust will allow you disperse funds to the beneficiaries at your discretion.

    Therefore, it makes sense to distribute profit to the beneficiaries who earn less – hence the tax benefit.

    A trust won't help with serviceability.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of Scott No MatesScott No Mates
    Participant
    @scott-no-mates
    Join Date: 2005
    Post Count: 3,856

    But if the only two real beneficiaries are Mrs & Mr No Mates who are both in the top tax bracket how do I save tax? It's fine when there are other beneficiaries (ie low income earners over the age of 18) but what if there aren't)?

    Trusts aren't exempt from land tax from $1 (generally)

    It costs $ to have the books done/company set up annually.

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069
    Scott No Mates wrote:
    But if the only two real beneficiaries are Mrs & Mr No Mates who are both in the top tax bracket how do I save tax? It's fine when there are other beneficiaries (ie low income earners over the age of 18) but what if there aren't)?

    Trusts aren't exempt from land tax from $1 (generally)

    It costs $ to have the books done/company set up annually.

    I agree with you.

    They have their place – but for a lot of people they don't seem necessary….but I'll leave that to their accountants to advise on.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of kateej03kateej03
    Participant
    @kateej03
    Join Date: 2011
    Post Count: 112

    Thanks Guys,

    Scott no mates – this is exactly our situation, although I don't earn in the highest tax bracket the development we are looking at doing will definitely get me there and my partner pays the highest rate so trying to work out if there is actually any point to buy in a trust.

    Kate

    Profile photo of jmsracheljmsrachel
    Participant
    @jmsrachel
    Join Date: 2012
    Post Count: 711
    Scott No Mates wrote:
    But if the only two real beneficiaries are Mrs & Mr No Mates who are both in the top tax bracket how do I save tax? It's fine when there are other beneficiaries (ie low income earners over the age of 18) but what if there aren't)?

    Trusts aren't exempt from land tax from $1 (generally)

    It costs $ to have the books done/company set up annually.

    What if you have your kids as beneficiaries, they are under 18 and don't work. Could you distribute profits to them?

    Profile photo of kateej03kateej03
    Participant
    @kateej03
    Join Date: 2011
    Post Count: 112

    We have no kids!

    Profile photo of Scott No MatesScott No Mates
    Participant
    @scott-no-mates
    Join Date: 2005
    Post Count: 3,856

    I believe that they can only get a small amount before they get hit with the highest rate of tax.

    Profile photo of jmsracheljmsrachel
    Participant
    @jmsrachel
    Join Date: 2012
    Post Count: 711
    Scott No Mates wrote:
    I believe that they can only get a small amount before they get hit with the highest rate of tax.

    That’s what I thought as well. Thanks for clearing it up.

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    Hi Katee

    Speak with a good accountant about your options and seek some professional advice. It needs to be an accountant that has a good understanding of IP related matters.

    Where are you based? 

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of Scott No MatesScott No Mates
    Participant
    @scott-no-mates
    Join Date: 2005
    Post Count: 3,856
    kateej03 wrote:
    We have no kids!

    I have 'No Mates"…. Just had to add that one. ;)

    Profile photo of kateej03kateej03
    Participant
    @kateej03
    Join Date: 2011
    Post Count: 112

    Thanks Jamie,

    We are in Perth. We did have a good accountant but they are screwing us around at the moment so need to find a new one!

    Kate

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    Trusts need to distribute income or the trustee will be taxed at the top rate. If your trust can only distribute to people on the top rate then there will be no tax savings.

    But most discretionary trusts have the ability to distribute to a company as a beneficiary. So what you could do is set up a company and have the trustee distribute to that. Companies pay 30% tax which result in some savings.

    The company could then onlend money to the trust, with tax advice, and the trust could buy more property. Eventually you may want to get some money out of the company and you could do this via dividends when you are on lower tax rates, or as loans (careful).

    The great thing about discretionary trusts is the flexibility. Distributions can be changed year to year at the discretion of the trustee and this is something that buying in your own name cannot assist with.

    eg. Imagine if one spouse stopped working for a year due to sickness or pregnancy, or travel etc.

    Kids can only get $416 from trust income per year without being hit with penalty taxes.

    But, a trust set up under a will or post death in some circumstances will have its income classed as exempted trust income and a child can pay tax at adult rates. This means roughly $20,000 pa fax free per child. So make sure you consider a discretionary trust in your will.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of kateej03kateej03
    Participant
    @kateej03
    Join Date: 2011
    Post Count: 112

    Thanks Terry,

    The idea of using a company as a beneficiary and lending back to the trust is someone we would would as all our profits will be going into more deals! I am trying to find a good accountant at the moment – if anyone can recommend one in Perth that would be much appreciated!

     

    Thanks,

    Kate

    Profile photo of Kohlhagen GroupKohlhagen Group
    Member
    @kohlhagen-group
    Join Date: 2011
    Post Count: 58

    Holding your property portfolio in multiple trusts can reduce your overall land tax bill.

    In WA trusts are usually assessed for land tax on the WA property owned within the trust (and is not aggregated with land you hold in your own name).

    With WA land tax the first $300,000 of land has a nil rate of land tax. Greater than $300k to $1M you pay 0.09%, $1M to $2.2M you pay 0.47% and so on…

    So for example if you hold two properties in your name, each with land value of $500k each, you pay $630 in WA land tax based on $1M land value.

    Now hold two properties, one in your name and one in a trust, both with land value of $500k each. You pay $360 in WA land tax based on $500k in your name ($180 land tax) and $500k in the trust ($180 land tax). So you save $270 per annum in land tax with a trust in this situation.

    As your portfolio grows (hopefully into the millions) you can realise significant land tax savings if you structure your portfolio correctly, either by using multiple trusts and or investing in multiple states.

    Always discuss land tax with your accountant or lawyer first, it differs significantly from state to state. I try stick to SA, which is similar to WA. As soon as I leave SA I like to dust off the books and ring the state Revenue office to confirm. Also the trust deeds need to be set up correctly.

    NSW seems to be the devilish state when it comes to land tax planning as trusts generally don't receive a tax free threshold there. However, Macquarie Group Services seems to offer a NSW Land Unit Trust, which they claim receives a land tax free threshold. They only deal with accounting and legal professionals, but maybe get your accountant to look into it if you have a large portfolio in NSW. (I don't have any affiliations, I just hate land tax).

    Also, when considering trusts you should consider the asset protection provided (or lack thereof) as well as any tax planning benefits.

    Hope this adds value

    Cheers

    Richard

    Profile photo of Mick CMick C
    Participant
    @shape
    Join Date: 2010
    Post Count: 1,099
    Terryw wrote:

    But, a trust set up under a will or post death in some circumstances will have its income classed as exempted trust income and a child can pay tax at adult rates. This means roughly $20,000 pa fax free per child. So make sure you consider a discretionary trust in your will.

    Interesting…So say im the solo trustee of  ABC trust, if this is included in my will ..does that mean my  next of kin can claim the above  ^ benefits/features? 

    Just a bit lost on what " a trust set up under a will " means.

    Regards 

    Mick C | Shape Home Loans
    http://www.shapehomeloans.com.au/
    Email Me | Phone Me

    Same Banks. Better Rates. Served With a Passion.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213
    Shape wrote:
    Terryw wrote:

    But, a trust set up under a will or post death in some circumstances will have its income classed as exempted trust income and a child can pay tax at adult rates. This means roughly $20,000 pa fax free per child. So make sure you consider a discretionary trust in your will.

    Interesting…So say im the solo trustee of  ABC trust, if this is included in my will ..does that mean my  next of kin can claim the above  ^ benefits/features? 

    Just a bit lost on what " a trust set up under a will " means.

    Regards 

    Short answer is that trust assets do not form part of your estate and cannot be passed via will.

    Say you own a property as trustee for a trust. You cannot pass this on in your will. You will need to consider who will take over the trust once your die. The trust will continue and a new trustee must be appointed. How this is done is usually stipulated in the trust deed. Usually it is the appointor that decides the new trustee. If you are also appointor then this doesn't help, so you must have a back up appointor in the trust.

    If you don't have a back up appointor it could be your legal personal representative who decideds. This would be your executor if you have a will. So careful consideration is needed as to who this will be. If for whatever reason you don't have a will then someone close to you can apply to the courts to become executor. They could even appoint a private trustee company – such as the Public Trustee.

    So you need to consider succession of your trust carefully or others may take control. And I have seen this happen.

    A will can contain provision for a trust too. eg. you can leave your house to Michael, or you could leave it to Peter as trustee for Michael. You can even have a full discretionary trust or a unit trust in your will. This is called  a testamentary trust.

    There are huge advantages to having a testamenary trust such as:

    1. asset protection if  a child later becomes bankrupt or goes through a family court dispute.

    2. Tax streaming

    3. Tax effective distribution to children – at adult rates meaning $20,000 pa per child tax free.

    So there are huge advantages to leaving property to loved ones via a trust structure.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of jleongjleong
    Participant
    @jleong
    Join Date: 2010
    Post Count: 8

    Hi All,

    I was just brushing up on Steve's book, specifically chapter 9 on trusts. It seems like it's possible to have a company as a trustee, then have multiple directors act as guarantor for a loan (belonging to the trust).

    Apologies if this sounds stupid , but this does mean that the income of the guarantor will be used to asses borrowing capacity, right?

    If this is the case, is it at all possible to declare the income of  2 separate trustees (e.g 2 separate directors under 2 separate company names) in a loan application, with the intent to increase borrowing capacity?

    I am yet to apply for a loan and i am concerned that i will have limited borrowing capacity with just my own salary. I also want to ensure I have an effective setup from the start.

    Thanks in advance,

    Jon

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    That book is not correct on this topic.

    And, I think you understanding of what was in the book is not correct either. He was not talking about multiple directors, but multiple trusts.

    Income of a guarantor will be used to assess the borrowing capacity. This includes all loans the guarantor has in their personal capacity and as guarantor. So setting up a new company or trust won't effect this as the other loans guaranteed will still affect the new loan applied for.

    You can increase borrowing capacity by having 2 directors of a trustee but you probably shouldn't for 2 reasons:

    1. asset protection

    2. Affect on future borrowings

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of jleongjleong
    Participant
    @jleong
    Join Date: 2010
    Post Count: 8

    Thanks Terry.

    Then, is it plausible to to have  2 trustees within a trust as guarantors? If so, wouldn't this address those 2 points you've highlighted?

Viewing 20 posts - 1 through 20 (of 32 total)

You must be logged in to reply to this topic. If you don't have an account, you can register here.