Kerry Packer, no matter what you think of the bloke, has made some powerful remarks in his time. But in my way of thinking, there is none more appealing than when he said ...
“Anybody in this country who does not minimize his tax wants his head read. I can tell you as a government that you are not spending it so well that we should be donating extra.”
I’m sure you already know Australia’s tax structures don’t exactly favour the top earners.
Statistics don’t lie. According to a Price Waterhouse Cooper study done in 2013, Australia is one of the toughest places for high-income earners to keep their own money. If you make $400,000, the government will let you keep just 59.3%, or $237,200.
What happened to nearly $163,000?? The government. That’s what happened.
Just for kicks and giggles, have a gander at how wealthy Australians stack up against other nations around the world. The blue, by the way, is the portion of your money they let you keep.
Australia isn’t doing so well on the global scale for tax burdens. We’re right up there with the best (or worst, depending on how you view it) of them.
So we’re being pillaged and plundered by the government like the feudal times of old. If not worse..
But I have good news for you!
All my clients who first come to see me complain about the same thing. There is an amazing tax structure we have in Australia with incredible loopholes that can assist you. Tax burdens don’t have to be so bad, as long as you set yourself with the right tax structure with a tax specialist.
What am I talking about? The family trust
And let me show you how it works.
In its most basic terms, a family trust is an agreement. One party will hold the assets for a time until they can pay another party. The settlor (lawyer, accountant, tax specialist...etc) will set up the trust for a very small fee, maybe $5 or $10. The trustee (an individual, but often a company) manages the assets in the trust, whether it’s money, property, or other investments. They control the trust, and they don’t own it. That distinction is VERY important come tax time.
And then you have the beneficiaries (you, your wife, your kids, your church...etc.), or the people getting paid out of the trust. It really doesn’t have to be more complicated than that. Here in Australia, we have 42 different types of trusts, but for your money, your best tax structure in Australia is the discretionary trust, also known as the family trust.
And why do we focus on the family trust as a spectacular tax structure in Australia?
First, you have an appointor, who is ultimately responsible for the trust. They have the power to sack the trustee (which we’ll get to in a minute) and hire a new trustee to manage the trust. They have the true power.
Watch out, because the family trust isn’t always the best option. The trust attracts a very high tax rate of 48.5% of you hold on to any income for the year.
Keep in mind the purpose of a trust is to distribute the income, not accumulate or retain it. By doing so, you could seriously lose a lot of cash to the government.
Secondly, a discretionary trust is not ideal for negatively geared property. If you want to own property that you can use to write off losses at tax time, the trust won’t work in your favour. Any losses you incur cannot come out of the trust but have to stay in there. This means you often cannot offset these losses against your personal income.
That defeats the purpose of negative gearing, so keep that in mind.
But there are some key benefits you should know for minimizing your tax with the family trust.
One of the key benefits of the family trust is that the beneficiaries can be anybody. The income from the trust can be paid to whomever you deem fit, and you have the freedom to determine the payout that aligns with tax planning and asset protection purposes.
In other words, who you pay, and how much you pay, can add up to some serious tax savings!
How does this practically work? The true power of this Australian tax structure comes after you distribute the income from the trust. Because that’s when the taxes are paid.
Any income distributed to beneficiaries gets taxed according to the recipient, not by how much the trust controls. Let me give you an example.
Let’s say you have Jerry and Lisa, a husband and wife with an investment company on the side that they are running through a family trust. In Jerry’s day job, he makes $150,000 a year. The little investment business has started doing some options trading, and they’ve had a good year, making $100,000 in profit.
Right now, that money is in the family trust. If that money went directly to Jerry, he’d be taxed at the top end of the table, paying $46,500 in taxes because of his day job salary. Lisa works from home on the business but has no other income. They can save tens of thousands of dollars in tax money if they use the simple trust distribution scheme.
They distribute $60,000 to Lisa because she makes no other income.
They take $30,000 and put it in a holding company for next year
They make a $10,000 contribution to their church.
Here is how the taxes would work on this smart little move.
Lisa would be taxed $13,500 in taxes for her $60,000 payment. The $30,000 gets taxed at the company flat rate of 30%, making another $9,000 tax payment. The $10,000 is tax-free when paid to the church (keep this in mind when we come to Benefit 3).
The total tax bill? $22,500 paid to the ATO, a considerably better sum than the $46,500 they were looking at originally. The compliance and set up costs for their family trust were minimal, so Jerry and Lisa walk out with tens of thousands of dollars more in their pockets for relatively no effort or cost on their part. That’s a win-win for everyone. Well, everyone except the Australian Tax Office, but they’re already taking enough, in my opinion.
This is only possible because the family trust allows taxes to be taken out after distribution, rather than before.
This is a big one. And it’s quite similar to the first point,
If you use your family trust to hold property that’s positively geared (making money each year above your debt service costs), the family trust is a smart decision, as long as you’ve had it from the start and you aren’t changing over from a sole trader to a trust halfway through an investment.
When it comes time to sell the property, you will get capital gains. And again, it’s very much the same principle as splitting income.
If you sold a property on your own, the capital gains would be taxed based on your current threshold, but if you sold in through a family trust, the gains are assigned to the trust, not to the individual.
Rather than the bulk proceeds (and therefore the bulk tax bill) being assigned to one person, the capital gains can be split up between the beneficiaries as it makes sense to minimize your tax bill.
As with any investment or major financial move, it’s best to consult with a tax specialist that knows what they are doing and has your interests at heart, not the ATO’s.
In the US and Canada, a good number of charities and churches offer tax receipts to offset your tax bills at the end of the year. Australia doesn’t really do that unless you have whats’ called a DGR, or Deductible Gift Recipient.
That DGR designation, chosen and assigned by the ATO, allows you to claim tax deductions against any money you donate to an organization or charity, a smart way to offset your tax bill.
Peter Martin wrote an eye-opening article in the Sydney Morning Herald about the wealthiest Australian paying little to no tax at all. One of the strategies that many of the ultra-rich use, Martin comments, is through tax deductions. Just 15 of the top earners claimed over $21 million in tax-deductible donations to organizations, charities, and political parties. But the secret is that many of those recipients didn’t have a DGR status. How did they do it?
This is a neat little feature of the family trust and one that doesn’t get mentioned nearly often enough. If you gift money to an unregistered organization, like a church, that donation would normally not offer a tax deduction for you.
But because the tax is paid after distribution to any beneficiaries, you can claim the tax deduction for even non-tax approved charities.
Remember that $10,000 donation that Jerry and Lisa made with their $100,000 profit? Ordinarily, that donation wouldn’t offer any significant tax benefits to the couple, but through a family trust, they can claim that $10,000 as a tax deduction, even without the DGR status.
From working at the ATO for 10 years to now offering tax specialization services, I know both sides of the tax matrix. I have been in the dark and have now come into the light!
I have extensive experience with Australian tax law as well as helping clients become sovereign financially to legally reduce their tax bill to $0.
Our mission at Wealth Safe is to help clients keep more of their money by using the tax structures in Australia and abroad available to them.
I’ve even been featured in the media as a proven tax specialist who gets results for my clients.
Can you use the family trust structure to keep more of your money? Absolutely. The politicians and farmers have been doing it for years, as has many others.
Would you like to find out more?
If so, fill in the online form with your details right now. We can set up a 30-minute no-obligation chat about your specific situation. I can show how I’ve helped my clients save hundreds of thousands of dollars, and how I can do the same for you.
Contact us today and start saving more of your money tomorrow.