Super Changes Push More to Family Trusts

by Dominique Schuh

With the legislated changes to superannuation just weeks away, trusts are becoming more popular as an "alternative" investment vehicle for those who have more to invest than the new super rules will allow. It is important to note that superannuation is still the most tax effective way to invest and that we see a trust as Plan B depending on your circumstances. Financial advisers have noted a marked increase in clients wanting to set one up, either dismayed by how little they'll be able to get into super after July 1 or fed up with government changes to retirement savings.

But who do they suit and what are the potential benefits? Just like a super fund, a trust is an investment structure into which you put money that's invested for you. A trust is tax-neutral in that it pays no tax on earnings and taxable income flows through to beneficiaries - a spouse, children and wider family members - and they pay tax on what they've been paid (their distribution). By comparison, super funds pay tax on earnings, albeit at a low rate (a maximum of 15 percent).

This sort of income splitting has long been a key attraction of family trusts. What's pushing them higher on investors' agendas is that after July 1 it's going to be harder to get large amounts into super. 10 years ago someone over 50 could get contribute $105,000 in a year to super.

Under the new rules, there will be a flat $25,000 for all ages making pre-tax ("concessional") contributions. Ten years ago you could make an after-tax ("non-concessional") contribution of $1 million but after July 1 it will be $100,000 a year (as long as your super balance is under $1.6 million at the end of the previous financial year). Flexibility is another reason more clients are considering trusts.

There are no investment rules, no contribution rules and no preservation requirements (rules on when you can withdraw funds), and unlike super, the trust can buy personal use assets like a holiday house. Family trusts can also be beneficial in the following circumstances:

1. Income splitting
2. Estate planning
3. Business merger
4. Capital gains
5. Asset protection
6. Second marriages

If you would like to discover if a family or discretionary trust can be part of an investment, tax or estate planning strategy please give us a call on 5482 2855.