Can my salary be paid into a family trust? The short answer is no.
You can’t get your salary, before tax, paid into a family trust to pay less tax.
This may seem like a shortcut, but it’s not possible. Here’s why.
Note: Here we answer the question of paying pre-tax salary into a family trust for tax reduction. Transferring post-tax salary as a loan or gift is another matter. It’s possible under certain conditions but has its own tax and legal issues.
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Trusts, Contracts and Tax Laws
Do you earn most of your money from your job? Don’t have many investments like houses or stocks? Trusts might not be much help. But don’t be discouraged.
However, if you earn a lot and have many investments? Trusts can be beneficial.
Got cash ready to buy more investments? Then starting a family trust is something you should seriously consider.
Tax laws say that the person getting the income pays the tax. So, you can’t put your salary straight into a family trust. Why? Your employer’s contract is with you, not your trust.
Want to send your salary to your trust? You’d need a separate contract between your trust and employer. Usually, that’s not practical. It might also break the rules about treating workers as contractors.
But there’s more. Think about specific tax rules in Australia. The rules of ‘Look-through tests’ and ‘Personal Services Income’ stop tax avoidance.
Look-through tests check the real nature of income. It doesn’t matter how the law sees it.
PSI rules stop people from sending income through trusts or companies to lower taxes. These rules make sure everyone pays their fair share of tax.
These rules make it hard to send your salary through a trust. But they make sure the right person pays tax. A new job contract won’t fix the problem. Tax laws make it even harder.
Trusts and Investments
Trusts do have advantages. They’re excellent at managing investments and businesses.
They enable efficient income distribution among beneficiaries. We call this method income splitting.
It’s a significant benefit of trusts. This is especially true for discretionary trusts.
It enables the distribution of income among different beneficiaries. It leverages their different tax rates to reduce the overall tax burden.
Employee Benefit Trusts
This article talks mostly about family trusts. But, some trusts are tied to jobs.
These include Employee Benefit Trusts and Employee Share Plans. Employers set these up to reward their staff.
These trusts have tax rules that are different from family trusts. Misuse can happen. For example, deferring tax on company profits.
This can get the Australian Tax Office’s attention. Regulators often check these trusts closely and apply strict rules.
Always speak to a trusted advisor before you join these schemes. Keeping these trusts in line with regulations requires careful management.
Summing Up
You can’t usually put your pre-tax salary into a family trust to pay less tax.
But trusts can still help a lot with managing investments and businesses. They make use of income-splitting strategies.
It’s essential to understand any trust’s specific tax and legal rules.
Always get expert advice that fits your personal situation. Do this before you make decisions about trusts, salary, and tax plans.
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