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Trust distribution & Centrelink

Discussion in 'Accounting, Tax & Legal' started by OLI, 1st Jul, 2007.

  1. OLI

    OLI Well-Known Member

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    This year I have a trust with a large amount of positive cashflow to distribute (thanks to the Navra Fund :) ). I also have three relatives receiving Centrelink benefits who I might talk to about making distributions of up to $6K to in order to make use of their tax-free threshold.

    Before I bring this up with them can anyone please tell me:

    1. How much income can a person on Centrelink benefits receive before it affects their allowance/s?

    2. How much income can a person on Centrelink benefits receive before they need to lodge a tax return? I'm fairly certain none of the 3 family members currently have to do this.

    Regards, Oli.
     
  2. DaveA

    DaveA Well-Known Member

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    i think you may find that centerlink payments are taxable, so you couldnt distribute 6k to them anyway i know youth allowance works this way, maybe check the website for details...

    it all depends on what type of allowance they recieve as to how much they can recieve,
     
  3. SydneyCider

    SydneyCider Member

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    Oli,

    Better check your trust deed first / or check with your accountant, you may find your trust deed doesn't allow any person on social secuirty payments to be a beneficiary.
     
  4. OLI

    OLI Well-Known Member

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    Thanks SydneyCider,

    You are right, my trust deed says:

    Exclusion of Certain Persons - the Trust Fund and the income thereof shall henceforth be possessed and enjoyed to the entire exclusion of and of any benefit to any person who is at that time a recipient of a means-tested Centrelink and/or Veterans' Affairs income support payment....

    If anyone is interested the link to the Centrelink list of which paymets are income/asset tested is:

    Is there an Income/Assets Test?
     
  5. OLI

    OLI Well-Known Member

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    Hi DaveA,

    I might have to look into distributing to children instead, although it looks like only the first $416 (or $1,334?) is tax-free for minors.

    Income of individuals under the age of 18

    Income of individuals under the age of 18
     
  6. MattR

    MattR Well-Known Member

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    OLI

    Check with your accountant and solicitor , the Deed may be able to be amended.
     
  7. DaveA

    DaveA Well-Known Member

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    i think the exact figure is $748, this is because all taxpayers are entitled to the low income tax offset, and anyone who earns below 748 the National Tax & Accountants Assoication (NTAA) has confirmed they do not need to lodge a tax return...

    this amount includes all interest from banks etc for safety id only distribute $700 to each kid.... but as always check with your accountant
     
  8. JamesGG

    JamesGG Member

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    Hiya,

    It would be worth checking with your accountant / solicitor, or even Centrelink, to ensure amending or removing that clause won't cause issues, too. The reason it is usually there is so that the trust's assets and income are not included in any means tests necessary for the recipient of government benefits.

    Cheers

    James.
     
  9. DaveA

    DaveA Well-Known Member

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    so is it better or worse to have this exemtion clause in the deeds??

    would you know if the MGS deeds have it in there, and can it be removed easily?

    Espically with the age pension test about to increase, i imagine some people might have opportunities to distribute to parents on part pensions and i wouldnt really like to close the door on that one...
     
  10. Nigel Ward

    Nigel Ward Team InvestEd

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    Step carefully with any amendment to the beneficiaries. That's highly likely to constitute a resettlement of the trust with very bad tax consequences.

    N.
     
  11. JamesGG

    JamesGG Member

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    Hiya,

    Yes Dave, the MGS deeds have this clause as standard. As Nigel pointed out for us, trying to remove this could have disastrous effects for an existing trust. Even for new trusts, I would generally suggest leaving the clause as it is.

    Cheers

    James.
     
  12. Rob G.

    Rob G. Well-Known Member

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    Regardless of other issues, it is too late to make an effective distribution to any class of beneficiaries that did not exist last financial year.

    Centrelink recipients also have an income test. As regular payments are assessable income accompanied by a tax offset then any additional income will most likely be above the tax-free threshold. Combined with a general benefit withdrawal rate of 20-25% then the effective tax rate can be quite high - the old poverty trap.

    Add the extreme paperwork hassle these days to retain Centrelink benefits when there is other income then such potential beneficiaries may not thank you for disturbing their status quo. Imagine with the assets test as well that a single distribution could possibly attract tax and then a 13 week loss of benefits if not managed well.

    They might still be ahead if they could use the distributions for co-contribution into super. Remember franking credits are refundable.

    Centrelink uses adjusted taxable income - i.e. add back fringe benefits & salary sacrificed super. Quite difficult to manage unless you are all cooperating as a close group.

    I believe Centrelink can demand a lot of information from discretionary trusts where potential beneficiaries are in receipt of state benefits.

    Maybe this is why standard trust deeds exclude such classes to avoid the pitfalls for the trustees ?

    Usual disclaimer: - You need to check these facts as I might not know what I am talking about, etc...

    Cheers,

    Rob
     
  13. austing

    austing Well-Known Member

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    Hi Gang,

    I have been through this saga. A couple of years ago we started distributing through the Discretionary Trust a small amount of around $30 pw to assist my mother-in-law with meeting her living expenses. She is on a full Centrelink aged pension and receiving Rental Assistance. I did make sure that any income distributed to her would not affect her pension. I can't remember the amount but a single aged penseniors can earn a few grand before it results in any reduction in the pension benefit. She is a beneficiary (not primary however) of the trust.

    Our first trust (not an MGS deed) which was setup around 5 years ago doesn't appear to have the Centrelink exclusion clause. Thank goodness as if it wasn't for this thread I wouldn't have even known to look for it. However our latest trust is an MGS deed so it is good to know that the beneficiary exclusion clause is in there.

    To cut a long story short a year or so after starting the distribution (ATO notify Centrelink of the distribution) a very distressed mother-in-law called about a letter received and I then spent quite a bit of time on the phone to her and Centrelink sorting it all out. And due to her wronging stating the nature of the income on her Centrelink income test form she had her benefits interrupted for a couple of weeks but later given back to her. Basically I had to complete a Private Trusts and Companies Module (huge number of pages requiring an incredible amount of detail) basically to prove that the mother-in-law: had no contol of the trust; had not gifted or contributed to the trust in any way; had no loan accounts with the trust; and was genuinely only getting the small distribution of around $30 per week as notified by the ATO.

    Fortunately the people I dealt with in this area of Centrelink were very nice and helpful. I didn't have too complete all detail on all the forms but just enough to prove the above mentioned requirements. Centrelink are very fair in this matter and are only trying to weed out those who are clearly doing the wrong thing. To avoid having to deal with a distressed mother-in-law in future years I nominated myself as the contact person for the annual paperwork so she didn't have to do anything.

    Each year after completing the initial paperwork Centrelink will send you a letter asking you to make a declaration stating whether or not there have been any changes in control etc of the trust. After receiving this subsequent letter for the first time I was again on the phone to Centrelink as the letter seem to once again require you to provide piles of information. However thanks to the nice contact people I was told that all I needed to do is send them a signed letter stating basically nothing had changed since completing the initial paperwork.

    Had I known it would be this much trouble I would never have bothered with the small distribution. However now the initial paperwork had been done and only a brief letter needs to be sent to Centrelink each year I may as well continue making the distribution to the mother-in-law.

    I imagine that there must be a heck of a lot of older trust deeds out there that don't have the exclusion clause in there. Certainly regardless of the deed this seems like an area that could cause grief for some. Fortunately as mentioned above Centrelink do seem to be sensible and fair in this matter.

    Hope this helps.

    Cheers - Gordon
     
  14. austing

    austing Well-Known Member

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