The party's over: Ralph moves in on trusts

Ralph changes to the taxation on entities will bring trusts in line with indi-vidual tax rates - a move which could put many unwary investors at risk of pay-ing too much tax come the end of financial year. Julie Bennett asked Rob Marie how to avoid the pitfalls.

Ralph changes to the taxation on entities will bring trusts in line with indi-vidual tax rates - a move which could put many unwary investors at risk of pay-ing too much tax come the end of financial year. Julie Bennett asked Rob Marie how to avoid the pitfalls.

Just in time for Christmas, the government announced proposed changes to the taxation on entities late last year, quietly ending the favourable tax treatment of family and discretionary trusts. Trusts will still be attractive investment structures according to Permanent Trustee's Rob Marie, however he says capital gains and losses within trusts will need very careful attention this financial year.

"Ralph means that prior to June 30 you can crystallise capital losses within a trust structure at 50 per cent; from July1 it will be cut in half to 25 per cent. This is timely because the market has just corrected. Of course, the re-verse applies - any capital gains within the trust structure should be deferred until after June 30."

Marie says investors will need to think carefully about acquiring high growth assets in trusts after 23 December 1999, the effective date of the Government's new laws relating to trusts.

"Any potential capital gain from a trust will face double the CGT than if the asset was owned by an individual." To counter-balance the effect, Marie says investors will need to consider other structures such as superannuation funds.

On the flip side, Marie says that investors already owning high growth assets acquired in trusts before 24 December 1999, should think carefully before sell-ing those assets. The capital gains on these assets will still get the 50 per cent exemption.

He also warns, "Be wary of borrowing or lending - this includes any deposit or withdrawal - from a trust. Unless the loans are commercial loans, set down in writing, paying at least the housing loan rate of interest for a period of not more than 25 years if secured over real property or seven years if not, then any loans to beneficiaries, or any repayment of loans to beneficiaries can, in cer-tain circumstances, be treated as a taxable distribution to the beneficiary from a trust."

Under the changes, record keeping becomes even more important. Marie says, "Not all payments to beneficiaries are taxable. Payments from prior taxed amounts and loans made to the trust prior to 22 February 1999 are not taxable. However, it is important to have the correct records to be able to correctly identify the amounts in these categories. Failure to be able to do so may re-sult in all distributions being taxable to beneficiaries."

Marie says that although changes to the taxation of entities removes some of the attraction of the vehicles, trusts are still a viable investment structure.

"If you listened to all the press, you'd just jettison trusts," he says. "But they are still play a vital role in many areas."

Specifically, Marie says they are the best structure for asset protection and are a useful way to split income.

"Trusts can be used to protect the assets of people who face potentially high risks of litigation or insolvency such as self-employed people. And trusts can still distribute income on a discretionary basis accumulation of income - trusts will pay tax at 30 per cent. This rate is substantially lower than the top mar-ginal rate of 48.5 per cent. Therefore trusts can still play a significant part where they are used to accumulate income, such as interest income. This could be useful where the trust holds assets which are not facing CGT, such as inter-est bearing investments, bonds, and so on."

Each investment structure has its place, according to Marie. "Planners need to think about what the client really wants to achieve - they need to think about which structure suits their goals and objectives. Trusts suit particular pur-poses, so does super, which is good for deferring tax but is not very flexible. Holding assets personally can be attractive because a lower capital gains tax now applies. But it all depends on who the investor is and what they need the money to do."

Marie says that in an effort to simplify tax, the government has unwittingly complicated matters.

"All the same investment structures are still around but appropriate use of them requires advice. Which is good news for financial planners - but it is a bit perverse because the government's aim was simplification. In fact investors, retirees and people funding their future are having to think long and hard about how they do it - and they're having to pay fees for that advice. And they probably need more than just financial planning advice - they also need advice from their tax accountant and stockbroker who all come from different perspec-tives. Permanent of course, has all three specialists under one roof."

Although Marie believes the direction the government is taking is good, he says people must be fully informed when making long term decisions about investment structures. "Investment performance is one thing - investment performance could be in the top quartile but if the money is in the wrong structure, the return could be wiped out."

Seven Salient Strategies for Trusts:

1. Think carefully about acquiring high growth assets in trusts after 23 Decem-ber 1999

2. Think carefully about selling high growth assets acquired in trusts before 24 December 1999

3. Be wary of borrowing or lending from a trust

4. Keep proper records

5. Do not automatically discard the use of trusts

6. Do not ignore the duties facing trustees

7. Carefully consider the circumstances of the individual investor