What sort of investments will reduce tax in my family trust?
I have a family trust structure for my business income and am looking at a large tax bill this coming year. What sort of investments are available to reduce the tax I will have to pay? I've heard of things like investing in trees or olives, but are these more trouble than they're worth? And what types of investments are not deductible?
Please be very careful! I have seen many successful business ventures make very bad investment decisions trying to minimise the tax that has resulted from their success.
There are a wide range of legitimate tax deductions to help reduce your tax burden, and some of them may not the most appropriate for your specific circumstances. The agricultural schemes you have mentioned above are a specific type of investment that largely appeal to those with a very tax-driven focus. Some are worthwhile and others are less so. All of them have a long-term to maturity and have high risk attached, so doing your homework is essential.
Basically these schemes involve you investing an amount of say $10,000, and $1,000 of this is used to purchase a garden or plot. The other $9,000 is used to plant a crop and becomes a tax deduction in the first years. The value of that initial $10,000 investment is now only $1,000 and as the crop grows and develops its value increases until harvest time in 7 to 14 years.
As you might imagine Australia is a tough environment that has seen agricultural booms and busts, and drought is a word very commonly used in this country. Prospectuses often use projections for these schemes that are initially very attractive and I would be very interested in seeing research on how many of the completed schemes actually match or exceed initial forecasts.
Some schemes rely on having a market for their product and that condition can change between the time of planting and the time of harvest, such is the long time-frames involved. I have heard of a number of successful outcomes for investors in these schemes as well as some disasters.
Wise investors will assess these schemes using internal rates of return excluding any tax savings to see the true value of the investment on a stand-alone basis. That is, without the tax benefits, would it still be a good investment? And of course if your scheme is successful then you still have a tax position to worry about again. It’s quite possible that buying the shares of the managers of some of these schemes may be a better investment than investing in the actual scheme.
Now you also mention you have a family trust entity. Family trusts are usually vehicles that allow asset protection and a distribution pipeline to the beneficiaries. You have the option of gaining deductions within the actual business, within the trust, or on a personal level with the beneficiaries once they have received their distribution.
It might be possible that the beneficiaries can receive the income from your successful business and then find more appropriate investments or deductions to suit their needs. Superannuation might be one of those investments that the business can pay on your behalf, or that you can personally make to claim a deduction once you have received a distribution as beneficiary.
It may be more appropriate to retain the profit and re-invest within the trust but there are many factors involved such as the original objectives in establishing the trust, the type of trustee, and the type of beneficiaries (i.e. minors, companies, post-retirees etc).
I would suggest you re-visit your business adviser or accountant and discuss your success and ways of dealing with it from the tax-perspective. It might be a range of actions such as delaying further income, bringing forward deductions, making super contributions, or a number of other measures.
Sometimes replacing tired business assets can assist you to generate further income and at the same time provide write-offs on old assets and depreciation on the new assets. This is where a good business adviser can truly add value to your overall position.
If you are not getting this advice then you may need to seek a new adviser.
Paul Jackson is a Brisbane-based Financial Planner with MacDonnells Financial Services, which is licensed under FYG Planners.
Disclaimer: This article is general in nature and is not intended as investment advice. Readers should always seek further advice before making any financial decisions.
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