A trust should not be formed solely for the purposes of creating tax advantages. If the Court's were to find this to be the case, it is likely that the tax will be levied via the use of the anti-avoidance provisions and also find the trust to be invalid, thereby taking away the protection it offers.
Provided that there is another valid reason for setting up one's family trust - for example for asset protection, the trust will benefit from any secondary tax advantages that may result from its establishment.
Creating a family trust therefore can also have taxation advantages. An example of a few benefits are that:
- Expenses incurred in deriving income can be offset against the trust's income. Consequently, you will now be able to reduce your 'taxable income' and therefore pay less tax.
Distributions of trustee income to beneficiaries will be taxed as beneficiary income and therefore will be taxed at the beneficiary's marginal tax rate. Provided the beneficiary's marginal rate is less than 33%, this will result in less tax being paid.
While tax minimisation is legal, the actions must not amount to tax avoidance which can result in significant consequences being imposed. To ensure this does not occur, we recommend getting advice prior to making the distributions.
It is possible to stream different types of income to different beneficiaries to take advantage of the beneficiaries situation.
For example, if there is foreign income (e.g. foreign sourced interest income) and a non-resident beneficiary, distributing the foreign income to them will not raise a tax liability in New Zealand as a non-resident is only subject to tax on income that has a New Zealand source
Establishing a family trust may also provide when establishing whether or not you are eligible for a residential care subsidy. In making this assessment:
Up to $6,000 can be gifted within a 12 month period in each of the five years before you apply for the residential care subsidy.
Gifts of more than $27,000 per year, per application made before the 5 year gifting period, may be added into the assessment
Loan repayments to the trust can be offset against the trust's income, which may not be possible if the loan repayment was made directly from the settlor in their individual capacity.
We use our catch up meetings and annual reviews to ensure you are able to take advantage of the taxation benefits your trust offers. To make an appointment, please click here.