Some advisors will tell you that you can use trusts to save loads of tax by “income splitting”. Here’s how it works –
Instead of leaving the income in the trust and paying 40% (now 45%) income tax, the income is awarded to beneficiaries (before the end of February) and will be taxed in their hands at their marginal tax rate. If their rate is low, then the tax saving is significant.
Yes, this is sometimes the right way to go, but normally we would want to keep the income in the trust and use it to build its investments (for your retirement), so taking the income out would be counter-productive. The better way is to have the trust own a company and the company to earn the income and be taxed at 28%.
Again, some trust advisors will tell you to take the income out, splitting it as above, then have the beneficiaries lend it back to the trust to be re-invested. But what they fail to recognise is that the wealth is still held outside the trust in the form of the debt owed by the trust to the lender. Not good. And of course, if the scheme gets too complicated it will fail simply for lack of maintenance. I’ve never yet seen one of those complicated arrangements working in practice.
Also s7 of the Income Tax Act and similar sections in the other tax acts can negate these arrangements and cause the income to be taxed in the hands of the person whose income producing resource is owned by the trust.
Should you wish to make an appointment, please feel free to visit Derek’s diary and book a time that suits you.