Some structures are used widely but cannot be understood easily; trusts are one of them. There are problems with taxes if trusts are not used properly. A trust is a structure that allows a person or a family to hold an asset that can benefit others. The person who controls an asset is the trustee, while those who benefit are known as beneficiaries.
Assets held in a trust can differ according to the property, business, premise of the business, shares are held in a trust. One who created the trust rules out how the assets are managed in the trust deed.
When assets are put in a trust, the assets are not owned by a person’s name. The trustee legally controls the assets, but one can control how the assets are managed in the future. A trustee has the power to decide who receives income from the trust.
Benefits Of A Trust
From the viewpoint of a trust, the most important advantage is that any income produced from the trust from business activities and investments can be distributed to beneficiaries. This is because the trustee has a choice to distribute the income to whoever they may want. Trustees can stream income in a tax-effective way from year to year. The problem is that since the trust’s income is not distributed properly, the trustees themselves have to pay tax on the undistributed income and there, the trust tax return rates are seemingly higher.
There are a few circumstances where a trustee needs to pay tax for certain beneficiaries; it happens when beneficiaries are children under the age of 18 and are disabled. In these cases, the assets held in a family trust cannot be troubled by lawsuits or creditors. This is why trusts (tax agents) are ideal for protecting assets from personal or business problems. The asset can also be transferred from generation to generation free of tax.
Issues With Trust
A major problem with trust is that they are considered the same as avoiding taxes for the ATO, mostly when a wealthy person uses it. An opinion has grown over the years that trusts are opened for hiding income, not revealing ownership of assets and performing transfers of funds free of tax between several people with the help of interest-free loans.
To avoid misunderstandings between opening a trust and avoiding tax, the ATO announced the formation of a special Trusts Task Force to look into non-compliance amongst several trust structures.
The areas where the task force will concentrate are as follows-
- Trusts or beneficiaries who have received considerable income and have not registered themselves did not lodge a trust tax return or their activity statements. This usually means income distributions on trust are not revealed on a tax return.
- Trusts that are a part of offshore dealings take advantage of tax shelters.
- Agreements that do not have any commercial basis direct income privileges to low tax beneficiaries like a wife or child, while others enjoy the benefits.
- When amounts are not properly characterised so that tax amounts do not know what took place, this could result in some parties receiving benefits from a trust while tax liabilities are not around.
- Where there have been mistakes in revenue activities for achieving concessional CGT treatment, one of such examples could be people using special purpose trusts to try to mistake property development or mining as capital gains that are not counted.
- When there are changes in trust deeds and other documents for achieving a benefit for tax planning, and cannot be explained for no reason whatsoever.
- When there are difficult transaction features or fake characteristics such as a round-robin income circulation among the trusts, income flows in a complex way, and it is not easy to follow the trail of entities.
- The taxpayers have a history of not abiding by the tax rules.
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Tax accountability of the beneficiaries
Discretionary trusts are not subjected to tax and are considered ‘flow through’ vehicles. In addition, trust incomes are taxed amongst the beneficiaries. The beneficiaries pay tax on the share of trust income they are subjected to. This doesn’t mean that the trust income is distributed amongst them; this is why great care should be taken regarding this matter.
The amount of tax one needs to pay depends upon the applicable tax rates to the concerned beneficiary. Like the income distributed to beneficiaries under the age of 18 could be taxed 60%. Tax planning flexibility is available via a trust as income can be distributed to beneficiaries tax-effectively every year. A trust cannot share losses amongst beneficiaries, and instead, losses are inside a trust and cannot affect the income.
Other Taxation Of Trusts
Even though the beneficiaries have to pay tax for trust incomes, a tax return still needs to be lodged by the trust. The trust’s tax return is a tool that matches data for the Australian taxation office. The ATO can review the amounts distributed by the trust unfavourable to the tax returns of the concerned beneficiaries.
There are situations where the trustee needs to pay tax on behalf of the trust. They need to pay taxes-
- The net income of a trust that is not accessible to the beneficiary
- Distributions to beneficiaries who are residing elsewhere
If the trustee is a company and that company does not have any business except to be a corporate trustee. Then it does not need an ABN number or TFN number; they also do not have to lodge a tax.
If a person has various business assets or a personal asset and never thought of opening a trust, then there is a lot to be gained by talking to a tax agent in Perth regarding the pros and cons. If one already has a trust structure in place, it might be time to leverage the benefits of having trust.