There has been a lot of talk lately about family trusts, as a result of Labor’s announcement it would introduce a new minimum tax rate on distributions.
Trusts are used by families for many reasons including building wealth, protecting their assets, adding to retirement savings, and looking after other family members, especially those who may not be able to look after themselves.
In particular, we have seen an increased interest in family trusts following the government’s ongoing changes that limit the amount of money people can save for their retirement through superannuation.
Trusts have a useful role to play as a safe, reliable and tax-effective alternative to the superannuation system and over the last few years we have seen an increase in the number of family trusts as a result of the superannuation changes.
The proposed Labor changes would significantly impact on the use of trusts in this way. Under the suggested changes, superannuation will become even more important given the now sizeable tax advantages it provides. Maximising concessional contributions at a younger age will become a much more necessary strategy.
Labor has proposed introducing a minimum tax rate, of 30 percent, on distributions from a family trust.
Therefore if a distribution is made to someone whose marginal tax rate is already above 30 percent (for example, someone who already earns more than $37,000, or those under 18 years old who receive more than $417 a year from the trust) the higher marginal tax rate will automatically apply.
If the changes are implemented, there is little doubt that the increased tax liability associated with family trusts will mean they are less likely to be used as a vehicle for building wealth.
Of course, the changes depend on whether Labor comes into government, and whether it will actually implement the proposed changes; unfortunately the result is that many people are now left in limbo wondering what their best option will be.
Many people will find other structures are more suitable to their needs if the changes come into effect.
Whether family trusts will continue to be used as the primary structure to build up wealth will now depend on individual tax positions, the potential beneficiaries, ages and whether asset protection is required, and professional advice should be sought.