How to manage income from a family trust

FAMILY discretionary trusts are used for many reasons.

By InvestSMART · 30 Jul 2011

By InvestSMART ·
30 Jul 2011

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FAMILY discretionary trusts are used for many reasons.

In recent years, they have been commonly used to operate a business or to own investments. The major benefit is the flexibility to decide how income earned by the trust is distributed. When a business is operated through a trust, income can be received as a salary, from distributions of the net income of the trust or a combination of both.

Q I am over 65 and have a trust controlled by my partner. I am not employed by the trust but work in the trust and receive income as trust distributions. Would I qualify for making a concessional or a non-concessional super contribution?

A As you have chosen to receive your income from the trust as distributions, rather than recognising the work you are doing with a salary, you would not pass the work test.

To pass the work test, you must receive payment for at least 40 hours of work done in a continuous 30-day period in the financial year you make a super contribution.

One of the main benefits of a family trust is the discretion a trustee has to distribute its net income to any, all or none of the beneficiaries.

This means the income you are receiving from the trust is net business income, and not income from working. If you operated your business as a sole trader, or a partnership, you would pass the work test.

Q I have a super balance above $500,000, am 63 and salary sacrifice almost $50,000 as a super contribution. Can you explain the difference between concessional and non-concessional contributions?

A Concessional super contributions result in a tax deduction for the employer or the self-employed person making them. Non-concessional contributions are made from after-tax income, which means there has not been a tax deduction allowed.

As your salary sacrifice contributions are being claimed as a tax deduction by your employer they will be classed as concessional contributions. If you received the $50,000 as normal salary, at a tax rate of 30 per cent, you would be left with about $35,000 in after-tax income. If you contributed the $35,000 to a super fund it would be classed as a non-concessional contribution, and increase your tax-free super benefits in the fund.

Questions can be emailed to super@taxbiz.com.au. Max Newnham's book, Funding your Retirement: A survival Guide, is available in bookstores.

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Frequently Asked Questions about this Article…

What is a family discretionary trust and why do investors use a family trust?

A family discretionary trust (often called a family trust) is a structure commonly used to operate a business or hold investments. The main benefit for everyday investors is flexibility: the trustee can decide how the trust’s net income is distributed to any, all or none of the beneficiaries.

How can I receive income from a family trust—salary, distributions or both?

If a business is operated through a trust, income can be received as a salary, as distributions of the trust’s net income, or as a combination of both. The choice affects taxation and whether that income counts as payment for work.

If I'm over 65 and receive trust distributions but I'm not employed by the trust, can I make concessional or non‑concessional super contributions?

If you choose to receive income as trust distributions rather than a salary, that income is treated as net business income and does not meet the superannuation work test. As a result you would not automatically qualify to make super contributions that rely on passing the work test.

What is the superannuation work test for people over 65?

To pass the work test you must receive payment for at least 40 hours of work in a continuous 30‑day period in the financial year you make a super contribution. Receiving trust distributions instead of a paid salary typically does not meet this requirement.

Does income from trust distributions count as work income for the super work test?

No. Income received as trust distributions is treated as the trust’s net business income, not income from working. If you operated as a sole trader or in a partnership and were paid for work, you would be more likely to meet the work test.

What’s the difference between concessional and non‑concessional super contributions?

Concessional contributions are made from pre‑tax income and are claimed as a tax deduction by the employer or self‑employed person (for example, salary sacrifice). Non‑concessional contributions are made from after‑tax income and do not attract a tax deduction.

How does salary sacrifice affect whether a contribution is concessional or non‑concessional?

Salary sacrifice contributions that your employer claims as a tax deduction are classed as concessional contributions. If you instead received the money as salary and paid income tax on it (for example taxed at 30%), then contributed the after‑tax amount to super, that contribution would be non‑concessional and increase your tax‑free super balance.

Where can I get more help or further reading about super contributions and family trusts?

You can email questions to super@taxbiz.com.au. For further reading, Max Newnham’s book, Funding your Retirement: A survival Guide, is available in bookstores.