The Government is cracking down on the misuse of trusts. The ATO says it has evidence of increased manipulation of trusts for tax avoidance or evasion.
A Trust is an entity that holds property or income for the benefit of others. It is a relationship rather than a legal entity.
Trusts are widely used for investment and business purposes. The most common variety of trust is the discretionary trust.
The benefit of establishing a trust is that it has limited liability if the trustee is a company. There is increased asset protection. It also does not cease with the death of a beneficiary. A discretionary trust does not have to pay tax where the whole of the net trust income is distributed. Instead, the trust beneficiaries pay tax on their share of the trust's net income.
A trust is more expensive and potentially complicated to establish than a sole trading or partnership arrangement. It can also be more expensive to do the tax and other paperwork each year.
The ATO has established a taskforce to crackdown on people misusing trusts including to avoid or reduce tax. It received $68 million over four years in the Budget to help it. Generally it is looking at higher risk taxpayers and is not targeting ordinary trust arrangements and tax planning associated with genuine business or family dealings.
The ATO says it recognises that most trusts are used appropriately and will continue to help those who genuinely err or face uncertainty over the application of the law to their circumstances.
If you are unsure about the full implications of your tax planning arrangements seek independent advice or get a ruling from the ATO. The ATO rightly says that “the reality is if your advice on a trust appears too good to be true, it usually is”.
This post is based on Greg’s weekly column in the Newcastle and Lake Macquarie Post.