Do you have a Family Trust? Read now
With the end of financial year approaching quickly, now is the time to review what strategies you can use to minimise your tax before 30 June 2020.
Save Tax – Avoid tax penalties by making your Trust Distribution Resolutions before 30 June 2020
Do you have a Discretionary Trust (also known as a Family Trust)?
If yes, you MUST keep reading!
In the lead-up to 30 June 2020, you need to complete your trust distribution resolutions before 30 June. Why? To avoid paying extra tax of up to 47% of Trust profits.
How can this happen?
If a Trustee of a Trust fails to make a resolution to distribute the income of the Trust before the end of the financial year, the Trustee may be assessed by the Australian Taxation Office (ATO) on the Trust income at the highest marginal tax rate of 47%, rather than the intended beneficiaries being taxed at generally much lower tax rates.
Save Tax – “Cap” tax using a “bucket company”
Using a “bucket company” can be a great strategy for saving tax on trust profits distributed.
A “bucket company” allows you to “cap” the tax on profits distributed by a trust to 30% or 27.5%. This is much less than the individual top marginal rate of 47%!
Here’s how this works:
Assume a trust earns $250,000 in profits from business or investment.
Option 1: Distribute profits 50 / 50 to Individuals 1 and 2. Total tax (inc. Medicare Levy) payable = $72,434 (29%)
Option 2: Distribute $90,000 each to Individuals 1 & 2 and distribute balance of $70,000 to a “bucket” company at a 27.5% tax rate. Total tax payable = $62,284 (25%). (Note: This strategy assumes that the $70,000 in cash is available to be distributed to a bucket company, otherwise what is known as a Div 7A Loan Agreement will need to be entered into and loan repayments made over a 7 year period.)
The VALUE of this strategy is $10,150 in TAX SAVED!
The cash in a “bucket company” can be used to invest in shares, property, or to lend to other entities at a specific interest rate.
But: You need to discuss this with us BEFORE to consider if this is applicable to you. There are different tax laws that affect the use of this strategy, and whether your “bucket company” can use a tax rate of 30% or 27.5%.
If you would like to discuss saving tax with super contributions, contact us ASAP. There are many factors we need to consider to ensure you don’t exceed your super caps, you may need to seek the advice of a licensed financial adviser, you have to get the paperwork right plus the timing of your contributions is crucial to get right to entitle you to a tax deduction for them in the 2020 year.
Imagine what you could do with your tax saved!
- Reduce your home loan
- Top up your Super
- Have a holiday
- Deposit for an Investment Property
- Pay for your children’s education
- Upgrade your Car
This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek tax advice from your accountants at KMT Partners. Information is current at the date of issue and may change.
Contact us today on 08 8431 0022. The sooner we commence tax planning, well before 30 June 2020, the sooner we can implement tax saving strategies for you.
A Guide To Minimise Your Business Tax 2020
Here is our business tax minimisation guide available for you to download for FREE. This guide outlines strategies and tips to assist you with considering how to minimise your business tax.