How does this strategy work?
Discretionary Trusts are great for Young Families in Business as they give you… you guessed it, DISCRETION.
In fact they’re more well known as Family Trusts.
They give you discretion about who pays tax, how much they pay and potentially when it’s paid.
So let’s combine the power of discretionary trusts with the fact the your parents may be in a lower income bracket than you are.
The example we’ll use is where your taxable income is $200,000.
Brace yourself… the folks are about to become more useful to you than just babysitters on date nights!
Option 1 (Without Tax Planning): Pay in your own name
The tax rate in your own name would be at individual rates, of up to 47%.
So you’d be up for $67,547 Tax.
Option 2 (With Tax Planning): Use your Discretionary or Family Trust to distribute income to retired parents.
Let’s say we were to distribute $37,000 to mum and $37,000 to dad.
Without being a numbers person, you can already see that you’ll be far better off!
What do you need to implement this strategy?
What about the in-laws, they’re retired too. Can I flick them $37,000 each too?
In most cases, yes - which just increases the tax savings! #FistPump
Why $37,000? Can I send them more?
Absolutely - but we wouldn’t recommend any more than $80,000 for each parent. The question of “how much” to give them is very dependent on your individual circumstances. We’ll discuss this when we talk.
I don’t have a Discretionary Trust in my Business structure, I’m just an ABN holder. Can I still implement this strategy?
No. And you shouldn’t be running your business as a sole trader. See our words of warning at the bottom of this article: https://inspireca.com/business-structuring-made-easy-part-2-sole-traders/
Do I have to actually give them the $37,000?
Yes. The cash needs to transfer to their accounts from the trust. What they do with the money after that is their decision!
I love this strategy, I didn’t do it last year, can we back date the strategy for last year too?
No. If you could have done this, you need to fire your accountant IMMEDIATELY.
You can only implement this strategy from the current financial year forwards.
What if my parents receive Centrelink?
Unfortunately receiving a distribution while they’re receiving Centrelink will remove or reduce their benefits.
The tax benefits usually DO NOT outweigh the reduction in benefits, so it is not efficient.
NEXT STEPS: You can book in a Quick 10 Min Chat here with an Inspire Chartered Accountant to talk about Tax Saving Strategies that will work for you.
We are fast approaching the end of the 2016 financial year, and now is the time where we proactively look for opportunities for our clients to save or defer tax (legally).
This Tax Planning service is all part of the INSPIRE experience which means our clients don’t have to pay any extra fees for this tax planning advice from us.
In fact, this is the time when we pay for our services over and over, like we did with Ross!
During Tax Planning, we’ll discuss your estimated profit for the full financial year and start brainstorming tax planning strategies.
If you’d like to have ‘in’ on this, let’s start with a quick 10 minute chat here: https://calendly.com/InspireCA
Keen for the detail?
How our Tax Planning Process works
First of all, we request from you details of your expected income and business profits for the 2016 tax year (1 July 2015 to 30 June 2016). This includes all wages / employment income, interest and dividends and rental income received, business profits / losses, and any capital gains / losses you expect to make.
Based on this information, we estimate your taxable income and your tax payable BEFORE any tax planning strategies. For example, we may calculate (based on your information) that you may have a taxable income of $100,000 for 2016. This would result in $26,947 tax and Medicare levy payable.
Secondly, we discuss all of your tax planning options. Some of these may be things to do in your business, and some of these may be investment / wealth creation options.
Third, we provide you with a report that explains in plain English the tax planning strategies we recommend and exactly how much tax you will save.
And finally, we provide you with an easy-to-follow Action Plan to ensure that both you and we can do everything that needs to be actioned before 30 June.
For every dollar in tax we save a small business, we give a family in need a days worth of access to life changing help. Here are some of the impacts -