To trust or not to trust – the benefits of a discretionary (family) trust for minimising CGT

Discretionary or family trust is a trust where the income generated in the trust can be distributed to the beneficiaries at the discretion of the trustee, or simply the income can be divided up however one pleases.

It is commonly known that a discretionary trust can be used as a form of tax minimisation, but to what extent is a trust beneficial.

In this example I will look at a simple case, a married couple with an investment property that has had a capital gains tax trigger. One person works with a salary of $100,000 a year while the other doesn’t. Logical sense would suggest that a trust would be beneficial in this situation since the capital gain can be distributed to the person with the lowest income, the person not working.

For the below charts I have calculated the tax of a 50-50 split and the tax of a discretionary trust from a capital gain from zero to $1,000,000 incremented by $10,000. One of the persons has a salary of $100,000.

First a direct comparison, it can be observed that up to around $400,000 that the 50-50 split pays slightly more tax, after $400,000 the tax is exactly the same. The reasons for this is the upper limit of the maximum tax threshold for an individual is $180,000, for two people it is $360,000, therefore when this is reached, it doesn’t matter whether it is a direct 50-50 split or a discretionary trust, the capital gains tax will be exactly the same.

Trust vs 50-50 split and CGT

Zoomed in to the zero to $400,000 range, it looks like there are some definite benefits to a discretionary trust.

Trust vs 50-50 split and CGT

Let’s look at the difference between the two scenarios in tax paid, a positive value is how much a discretionary trust minimises tax compared to a 50-50 split. It can be observed that a maximum of $4000 is saved when the capital gain is $260,000, not much of a saving. Further, as per above, at capital gain greater than $360,000 there is no difference.

Trust vs 50-50 split difference

Now one of the problems with a discretionary trust is the yearly management and compliance costs, let’s assume this is $1,000. Let’s add this to the differences chart. As expected this shifts everything down by $1,000.

Trust vs 50-50 split difference with management fees

And what this does is makes a trust scenario a bad choice for any capital gains greater than $360,000.

So what does this mean, simply, in the above situation a discretionary trust does not provide any significant benefits for capital gains tax minimisation compared to a 50-50 split.

One also needs to take into consideration the cumulative costs associated with a trust. If a property is held in a trust for four years, this is $4,000 of cumulative yearly costs which negates any benefits of a discretionary trust.

Further, if both parties are not working, there will be a disadvantage with a discretionary trust due to the yearly costs.

A discretionary trust may be beneficial for positively geared investment properties, and I will discuss this later on. But when asked the question, should I purchase an investment property into a discretionary trust to minimise future capital gains tax, it makes no difference as the CGT is relatively the same.

I will also add, what about a married couple with children, surely I can distribute the capital gains within my family, yes you can, but minors (children under the age of eighteen) are taxed at the highest tax bracket, so it is beneficial only when the beneficiaries are adults.

Next I will investigate the benefits of a discretionary trust for minimising annual income tax.

Calculate Stamp Duty with Excel

A quick post of how to calculate the Stamp Duty of a property with Excel, in my example I am using the Western Australia Residential Rate Dutiable value.

Stamp Duty
Cutoff [$]  Rate [%]  Duty [$]  Formula
0           1.9       0    0
120000      2.85      2280      =C3+(A4-A3)*B3/100
150000      3.8       3135      =C4+(A5-A4)*B4/100
360000      4.75      11115     =C5+(A6-A5)*B5/100
725000      5.15      28452.5   =C6+(A7-A6)*B6/100

Property Value        500000    
Duty                  17765     =VLOOKUP(C9,A:C,3,TRUE) + (C9-VLOOKUP(C9,A:C,1,TRUE))*VLOOKUP(C9,A:C,2,TRUE)/100

Download the Excel WorkBook.

Update, next day
This also works for Individual income tax rates;

Tax Rates            
Cutoff [$]  Rate [%] Tax [$]  Formula
0           0        0        0
6000        15       0        =C3+(A4-A3)*B3/100
37000       30       4650     =C4+(A5-A4)*B4/100
80000       37       17550    =C5+(A6-A5)*B5/100
180000      45       54550    =C6+(A7-A6)*B6/100
Income               100000    
Tax                  24950    =VLOOKUP(C9,A:C,3,TRUE) + (C9-VLOOKUP(C9,A:C,1,TRUE))*VLOOKUP(C9,A:C,2,TRUE)/100