In addition to building up their superannuation balances, families should also consider setting up a family trust to hold much of their family’s investment assets.
A family trust may hold a range of different assets including:
- Investment properties
- Investment portfolio (comprising various asset classes)
- For SME business owners, shares in the business operating entities
- Business premises used by the operating entities
- Personal use assets such as holiday homes, boats (but not the family home).
Advantages over SMSFs
Unlike superannuation funds, there are no restrictions on the amounts that can be contributed to a family trust, and no specific compliance requirements other than documenting annual distributions to beneficiaries, preparing annual financial accounts and lodging tax returns.
This makes a family trust the perfect companion to a self-managed superannuation fund (SMSF) – as a first step a couple looking to build up their family wealth would each typically maximise their concessional super contributions each year.
If excess cash is available, families could also consider making non-concessional contributions to their SMSF, and/or loaning some of the excess cash into their family trust, which would then be used by the trust to acquire the desired investments.
Both SMSF and trust
It’s not, however, a question of having either a SMSF or a family trust - we generally recommend using both under the family’s overall strategy.
Key advantages of using a family trust as an investment vehicle include:
- Very strong asset protection from creditors (but not necessarily in family law matters)
- Total flexibility when distributing income and capital, which can be very tax effective and allows for changing family circumstances from year to year and over time
- Can improve ability to use small business capital gains tax (CGT) concessions and, unlike an investment company, allows individual beneficiaries to receive the 50% CGT discount
- The family trust falls outside a person’s deceased estate, so control of the trust can be passed down through generations regardless of the terms of any Wills.
One of the main disadvantages from a tax viewpoint is that losses from negatively geared investments remain trapped inside the trust, and cannot be distributed to family members. However losses can be carried forward and offset against future trust income.
So in the short term it may still be worthwhile holding negatively geared investments in individual names, but once the family starts building its wealth, especially if there are no borrowings or at least where they are positively geared, a family trust structure is usually preferable.
The superannuation changes due to take effect from 1 July 2017 introduce two more key points that will push even more of the family’s wealth into a family trust.
Firstly, the reduction in the annual non-concessional contributions cap to $100,000, and the concessional cap to $25,000, means that a couple will be able to contribute only $250,000 between them each year to their SMSF. Any additional savings that they wish to invest will need to use another investment vehicle, and this is where the family trust may be useful.
Secondly, the $1.6 million cap on the amount of assets that can be allocated in a super fund to pay a tax-free pension in retirement may provide an incentive to hold at least a portion of the excess investment assets outside of super, and again a family trust is likely to be a useful vehicle for this.
As people get closer to retirement, however, they will usually start to move more of their investment assets from the family trust or their own names into a SMSF.
But once they are in retirement and drawing down a tax-free retirement pension, any funds in excess of their immediate needs can be parked in the family trust and either accessed by them as needed, or accumulated to be passed on to their children and grandchildren as they wish, with total flexibility and without any immediate tax implications.
By contrast, any amounts that remain in the SMSF at the death of the second spouse will need to be paid out to their beneficiaries, and there will be tax consequences of the death benefit paid.
Peter Bembrick, tax consulting partner, HLB Mann Judd Sydney