What is a Discretionary Family Trust?
The first type of trust is a Discretionary Family Trust which is one of the ones used most often by businesses which are not large in Australia. This is because such a trust can be set up to benefit the holders of the units in a trust such that the unit holders are related family members. It allows members of a family to share around the tax impositions in order to maintain the most tax effective structure possible for the family as a whole. It allows family members to collectively protect assets from taxation. It is very useful if the family holds capital growth based or cash flow based assets. Some of the advantages of this type of trust structure are that it can protect other members of the family from bankruptcy and insolvency and it is quite cheap to set up and administer. If you have other members of your family who are on low incomes, you can distribute the income between them to maximise your tax position.
Looking at the Tax Position, the advantages are obvious, for instance: A company pays 30% tax. After $60,000 you pay tax at 48.5%. However, if you realise a capital gain then your highest rate may drop by half to 24.25% and then half again to 12.12%. Given CGT roll over relief, you may be able to get that rate down to zero. Super pays tax at 15% (10% when it sells CGT assets). This rate distortion in the tax system means that you have to plan ahead. Perhaps 2 generations ahead of yourself.
If you have any questions about these types of trusts, we would be more than happy to assist you. Please do not hesitate to contact us with questions about these types of trusts.