Saving tax through a trust

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.

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

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

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.

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

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.

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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.

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