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Tax benefits of trusts doesn't extend to evasion

Nicki Bourlioufas  |  05 Jun 2017Text size  Decrease  Increase  |  

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Asset protection and tax effectiveness are key reasons to set up family trusts, but it's essential to maintain proper records to avoid being a target for the ATO.


A trust can be a tax-effective legal structure wherein a person hold assets for the benefit of others. The person who controls the asset is the "trustee" and those who benefit are the "beneficiaries".

Under a trust structure, any income generated by the trust from business activities and investments, including capital gains, can be distributed to beneficiaries in lower tax brackets, including spouses and children, according to tax accountants H&R Block.

"Because the trustees of the trust have the 'discretion' to distribute income and capital as they see fit--and no beneficiary has a fixed entitlement to receive anything--the trustees are able to 'stream' income in a tax-effective way on a year-to-year basis," say the tax accountants.

According to Richard Felice, managing director with countplus one, asset protection and tax effectiveness are key reasons to set up family trusts.

"Very often, a family or discretionary trust is relevant even if you don't have a large amount of assets. The benefit can largely be tax-driven. Because the trustee has discretion over how investment profit of the trust will be distributed, there can be significant tax savings in distributing the profit among the beneficiaries," says Felice.

"If, for example, the beneficiaries are a high-income-earning wife and their spouse who doesn't work, then the profits of the trust can be distributed to the lower-income spouse to minimise the couple's overall tax liability."

The benefits of trusts also extend to asset protection: "When using a company as the trustee, the trust is treated as a separate entity from a person, so even if a person goes bankrupt, the assets of the trust will be protected," says Felice.

"So, if, for example, a person is employed in a higher-risk job and is at risk of being sued, that person's assets would be shielded from any lawsuit."

However, the downside to a trust is that to the extent they don't distribute the income of the trust, the trustee is liable to tax on the undistributed income.

The trustee also must pay tax on behalf of certain beneficiaries, the most common ones being children under the age of 18 or people with certain disabilities. A trustee is required to lodge a trust income tax return, regardless of the amount of net income involved.

Another downside is the perception by the Australian Taxation Office (ATO) that trusts can be used to avoid tax.

"Family trusts are potentially very lucrative in terms of the tax benefits they provide, so they can be targeted for audits by the ATO. So, it is essential to maintain proper records including annual trustee resolutions," says Felice.

To combat this perceived high risk of tax evasion, the government has set up a special Trusts Taskforce, which has targeted non-compliance among the millions of trust structures.

The federal government allocated $67.9 million in the 2013-14 Budget to be spent over four years for targeted compliance action against people who have been involved in tax avoidance or evasion using trusts.

Over the past three and a half years, the ATO has raised $885 million in liabilities and collected $233.6 million. In addition to the cash collected, assets of $55 million have been restrained under proceeds of crime legislation.

"We target known tax scheme promoters, individuals, and businesses who participate in such arrangements. We also identify and deal with abusive use of trusts using our intelligence systems and analysis of tax returns," the ATO says.

"In the most serious cases, we pursue criminal sanctions in collaboration with law enforcement authorities through the Serious Financial Crime Taskforce, and collaborate with overseas authorities."

The ATO is checking, for example, whether family trusts have received substantial income and are not registered, or have not lodged tax returns or activity statements.

The taxman is also targeting trusts involved in transactions with offshore tax havens, as well as agreements with no commercial basis which direct income entitlements to a low-tax beneficiary.

"The Trusts Taskforce targets higher-risk taxpayers--not ordinary trust arrangements or tax planning associated with genuine business or family dealings," the ATO says.

"We recognise that most trusts are used appropriately and we will continue to help those who make genuine mistakes or are uncertain about how the law applies to their circumstances."

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Nicki Bourlioufas is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

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