This underrated tax hack can save you $42,986 annually—here’s how
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Let's face it, taxes are a fact of life, and we're all familiar with the feeling of wading through those complex rules. We understand our obligations, but no one wants to part with more of their hard-earned money than necessary.
What if you could use the system's intricacies to your advantage instead of feeling overwhelmed? It's about working smarter, not harder, with the tax system.
One finance expert is highlighting a strategy that, while not widely known, could unlock substantial annual savings.
Ben Nash, a finance expert, stressed that a family trust isn't just for the ultra-wealthy. It's a tool that can benefit many Australians with substantial savings and investments.
The primary advantage of a family trust is its ability to distribute and stream income across multiple taxpayers. By doing so, you can leverage the marginal tax rates of various family members and reduce the overall tax burden.
Let's break down the numbers to see how this works in practice. Imagine an individual earning $200,000 a year. Under current tax rates, they would owe $69,138 in taxes.
However, if that income were split between two people, the tax payable would drop to $22,788 per person, or $45,576. That's a savings of $23,562 on the same amount of income.
Take it a step further: distribute that income across four people, and the total tax paid could be as low as $26,152. That's an annual tax savings of $42,986.
When managing a trust, any income it earns must be distributed to a ‘beneficiary’. Beneficiaries include yourself, your partner, your children, and other family members.
If you don’t do this, the income will be taxed at 47 per cent. Once you distribute the trust income to a beneficiary, they will pay taxes on that income based on their tax rate.
Additionally, you can allocate trust income to your own private company. This can be a smart move for saving on taxes since the tax rate for companies is just 30 per cent, which is significantly lower than the personal tax rate of 47 per cent. This strategy can be especially beneficial if you earn a high income and want to grow your wealth.
But how does one set up a family trust? It's a process typically handled by an accountant or lawyer, involving the creation of a 'trust deed'—the document that outlines the trust's rules and ensures compliance with tax laws.
Once you’ve created a trust, the next steps are registering it, getting a tax file number, and managing assets like bank accounts, investments, and property. Every year, you’ll need to file a tax return for your trust with the Australian Taxation Office, and it’s a good idea to work with a reliable accountant to help with this.
Setting up and running a trust can come with costs ranging from $2,000 to $5,000, and you’ll likely spend about $3,000 each year for tax reporting. However, the tax savings you can achieve will make these expenses worthwhile.
A trust is a financial tool that allows you to manage and distribute income among people for tax purposes. However, it's important to remember that the trust must earn the income you can split.
Any money made from those investments is considered trust income if your trust owns rental properties, stocks, or bank accounts. If you’re self-employed and bill clients through your trust, that income amounts to trust income.
On the other hand, if you work for a company and receive a salary, that money is yours personally and cannot be included as income for the trust.
Have you used a family trust to manage your tax obligations, or are you considering it? Share your experiences and thoughts with us in the comments below. Your insights could help fellow readers make informed decisions about their financial futures.
What if you could use the system's intricacies to your advantage instead of feeling overwhelmed? It's about working smarter, not harder, with the tax system.
One finance expert is highlighting a strategy that, while not widely known, could unlock substantial annual savings.
Ben Nash, a finance expert, stressed that a family trust isn't just for the ultra-wealthy. It's a tool that can benefit many Australians with substantial savings and investments.
The primary advantage of a family trust is its ability to distribute and stream income across multiple taxpayers. By doing so, you can leverage the marginal tax rates of various family members and reduce the overall tax burden.
Finance expert Ben Nash advised that a family trust could deliver potential annual tax savings of $42,986. Credit: Pexels
Let's break down the numbers to see how this works in practice. Imagine an individual earning $200,000 a year. Under current tax rates, they would owe $69,138 in taxes.
However, if that income were split between two people, the tax payable would drop to $22,788 per person, or $45,576. That's a savings of $23,562 on the same amount of income.
Take it a step further: distribute that income across four people, and the total tax paid could be as low as $26,152. That's an annual tax savings of $42,986.
When managing a trust, any income it earns must be distributed to a ‘beneficiary’. Beneficiaries include yourself, your partner, your children, and other family members.
If you don’t do this, the income will be taxed at 47 per cent. Once you distribute the trust income to a beneficiary, they will pay taxes on that income based on their tax rate.
Additionally, you can allocate trust income to your own private company. This can be a smart move for saving on taxes since the tax rate for companies is just 30 per cent, which is significantly lower than the personal tax rate of 47 per cent. This strategy can be especially beneficial if you earn a high income and want to grow your wealth.
But how does one set up a family trust? It's a process typically handled by an accountant or lawyer, involving the creation of a 'trust deed'—the document that outlines the trust's rules and ensures compliance with tax laws.
Once you’ve created a trust, the next steps are registering it, getting a tax file number, and managing assets like bank accounts, investments, and property. Every year, you’ll need to file a tax return for your trust with the Australian Taxation Office, and it’s a good idea to work with a reliable accountant to help with this.
Setting up and running a trust can come with costs ranging from $2,000 to $5,000, and you’ll likely spend about $3,000 each year for tax reporting. However, the tax savings you can achieve will make these expenses worthwhile.
A trust is a financial tool that allows you to manage and distribute income among people for tax purposes. However, it's important to remember that the trust must earn the income you can split.
Any money made from those investments is considered trust income if your trust owns rental properties, stocks, or bank accounts. If you’re self-employed and bill clients through your trust, that income amounts to trust income.
On the other hand, if you work for a company and receive a salary, that money is yours personally and cannot be included as income for the trust.
Have you used a family trust to manage your tax obligations, or are you considering it? Share your experiences and thoughts with us in the comments below. Your insights could help fellow readers make informed decisions about their financial futures.
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