What is a family trust in Australia and how is it taxed?
A family trust in Australia is a type of discretionary trust used to hold assets and distribute income among family members. It offers tax flexibility, as income can be distributed to beneficiaries in lower tax brackets, and provides asset protection, though specific tax rules apply.
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How it works in practice
What is a Family Trust?
A family trust in Australia is typically a 'discretionary trust' established to hold assets (like property or investments) and distribute income to a group of family members (beneficiaries). A trustee, who can be an individual or a company, manages the trust's assets and income according to the trust deed. The key feature is the trustee's discretion over how much income each beneficiary receives, offering significant flexibility.
How are Family Trusts Taxed?
The trust itself is generally not taxed in Australia. Instead, the net income generated by the trust is typically distributed to its beneficiaries, who then pay tax on their share of the income at their individual marginal tax rates. This allows for tax-effective income distribution, as the trustee can allocate income to beneficiaries with lower taxable incomes to minimise the overall tax burden for the family. The trust must lodge an annual tax return with the Australian Taxation Office (ATO).
Important exceptions
If the trustee fails to distribute all the trust's net income, the undistributed income may be taxed at the highest marginal tax rate (currently 47%). Special tax rules apply to income distributed to minor beneficiaries, which is often taxed at penalty rates to prevent income splitting to children. Capital gains realised by the trust are generally passed on to beneficiaries, subject to their individual circumstances. Additionally, Division 7A of the Income Tax Assessment Act 1936 can impact trusts that make payments or loans to shareholders or their associates, potentially treating these as unfranked dividends.
What you should do now
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Consult a legal and financial advisor to determine if a family trust suits your specific financial and family goals.
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Work with legal professionals to draft a comprehensive trust deed, clearly outlining the trustee's powers, beneficiaries, and distribution rules.
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Appoint a suitable trustee (individual or corporate) and ensure they understand their fiduciary duties and legal obligations.
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Obtain a Tax File Number (TFN) and Australian Business Number (ABN) for the trust from the Australian Taxation Office (ATO).
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Lodge an annual tax return for the trust and ensure all income distributions to beneficiaries are made and reported correctly by 30 June each year.
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