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Maximizing Tax Benefits for Discretionary Trusts in Australia

If a trust doesn't meet specific criteria, like having a fixed structure, it can face challenges in tax planning. However, Australian law offers options for discretionary trusts, commonly known as family trusts, to still gain tax benefits even in years with no income.

For example, in a year where a discretionary trust earns no income, it can select certain beneficiaries to be treated as actively involved in the trust's primary production business. This provision helps in income averaging, a strategy to smooth out tax liabilities over multiple years.

For such trusts, the trustee can nominate a maximum number of individual beneficiaries for income averaging purposes. This number can be either 12 or the count of individuals who were involved in the trust's primary production business in the previous income year, whichever is higher.

Similarly, for Farm Management Deposits (FMD) purposes, the trustee can nominate a maximum number of individual beneficiaries. Again, this number can be 12 or the count of individuals treated as involved in the primary production business in the previous income year.

However, it's crucial to follow specific guidelines when choosing beneficiaries in a loss year:

1. The trustee must make the choice before lodging the trust's tax return for the relevant income year, unless additional time is granted by the Commissioner.
2. The choice must be in writing, specifying whether it's for income averaging and/or FMD purposes, and signed by both the trustee and the beneficiary.
3. While the choice doesn't need to be submitted to the Australian Taxation Office (ATO), once made, it's final and cannot be changed.

Example: How It Works

Let's consider the Fraser Farming Discretionary Trust. In 2019, it engaged in primary production, and 14 beneficiaries were involved in its business. In 2020, despite no income, the trust can still benefit from income averaging and FMD provisions by nominating up to 14 beneficiaries. Importantly, these beneficiaries can be different for income averaging and FMD purposes, allowing flexibility in tax planning.

For any questions or assistance regarding tax planning for discretionary trusts, reach out to Tax Ideas Accountants & Advisers at +61 2 83181545, or schedule an appointment through our live calendar.

• Topics on beneficiaries of loss trusts to access concessions (1)