In Budget 08, the new Federal Government introduced changes to legislation governing Family Trusts which apply from 1 July 2008. One of these changes focuses on limiting the ability of family trusts to distribute income.
According to Scott Arnold, partner of Walker Wayland NSW, the changes reflect a lack of understanding at the Federal Government level of how family trusts operate.
“Unfortunately this lack of understanding at the Federal level comes down to a wrong perception of family trusts which is also common in the broader community too,” says Scott.
“Essentially, this perception asserts that family trusts are the preserve of the rich and wealthy and are used only as a mechanism to avoid tax.
“In reality, family trusts are a legitimate vehicle through which assets and investments of a family group can be held for the benefit of the entire family.
“Rather than give assets to individuals, all assets including investments are pooled, with the income from this pool used to support the family group,” Scott says.
Essentially, the budget changes relate to reversing two provisions:
This second change has significant consequences:
Under a further restriction also applying from 1 July 2008, family trusts will be prevented from making a one-off variation to the nominated individual specified in the family trust election except in the case of marriage breakdowns.
According to Scott, the usefulness of family trusts in building assets was emphasised following a change to tax deductible super contributions as this reaffirmed family trusts offered a viable, alternative investment structure.
“Last year, changes to tax deductible super contributions for people aged under 50 reduced the amount of contributions from $105,000 to $50,000,” Scott says.
“By investing this money in a family trust instead, people maintain access to their money at all times rather than locking this away in a super fund which they can only access after 65, or after satisfying another condition of release.
“It’s important to emphasise that as with any other tax strategy, there must be a viable commercial or wealth creation reason for establishing a family trust otherwise people are playing right into those perceptions of tax avoidance,” he said.
People concerned about this issue should contact their local Walker Wayland business adviser or contact Scott Arnold at Walker Wayland NSW.