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How can I use trusts to reduce tax?

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I keep hearing of people using trusts to reduce their tax but I don’t understand what they are and how they cut your tax bill. Could you please explain?

With a trust, a person or even a company agrees to hold assets for the benefit of some other people. The trustee holds the assets and those who receive benefits are the beneficiaries. The trustee has legal control while the beneficiaries aren’t even mentioned on bank accounts and other related legal documents. The assets are owned by the trust – not the trustee or the beneficiaries.

There are different types of trusts that suit different situations. A discretionary trust allows the trustee to work out who gets the income and capital the trust owns, and is one of the most common ones used.

People opt for these if they fear being sued, and having their assets owned by the trust can protect them from losing these assets.

They help tax-wise by including, say, family members who are in lower tax brackets, so the higher income members could see rental income from an investment property going to these lower taxed members of the trust.

A unit trust has units and the units held determines how income and capital is carved up.

Some important points are worth noting:
  • A person, company, charity or even a trust can be a beneficiary.
  • The trust does not pay tax but the beneficiary does.
  • The assets can include shares, property and art.
  • Any profits not distributed to beneficiaries is taxed at 47 per cent as a penalty.
  • A trust can borrow money but sometimes a personal guarantee is needed to get you past a banker.
  • A discretionary trust is not good for a loss making, negatively geared property because the losses in a trust cannot be passed onto beneficiaries to reduce their tax bill.
There’s more to learn but that’s a really good start.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Tuesday, February 15, 2011

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