Are you a regular donor to a Church, charity or other non-profit, and you hold a business or investments through a discretionary (family) trust? In many cases you can use your trust to donate money to your favourite non-profit and save tax at the same time. Or you can use the tax saving to boost the amount you give, at the same after-tax cost to you.
If your favourite non-profit does not have tax-deductible gift recipient status (and many do not), you currently donate to it from after-tax income and you are in the top tax bracket, every $1 you give costs you nearly $2 in pre-tax income. In many cases you can, however, make the non-profit a beneficiary of your discretionary trust and distribute pre-tax income to it from the trust, dramatically reducing the tax cost of donations.
When a discretionary trust distributes income it is the beneficiary, not the trustee, that is normally liable to pay tax on the amount. If the beneficiary is tax-exempt (as most non-profits are) the money will pass through the trust into their account tax-free. The examples below assume you are on the top marginal tax rate in the 2016-17 financial year:
Example 1 – You give $500 to a non-profit from income which your trust has already distributed to you. The trust made a gross distribution of $995 to you: you paid $495 tax and donated the $500 that remained. A rather expensive way to give, you will agree.
Example 2 – Your trust distributes money directly to the non-profit. Your trust could either pay the non-profit:
- $995, for the same before-tax cost to you as the $500 gift in Example 1; or
- $500, the same gift as in Example 1, but leaving you $250 better off after tax. The remainder of the pre-tax $995 from Example 1 ($495) is a gross distribution to you, but you would pay only $245 tax on that amount.
If the non-profit is a tax-deductible gift recipient there is no need to adopt this strategy if you are simply seeking to save tax. In that case you could just make your gift to the non-profit from after-tax income and claim a tax deduction. If, however, your intention is to boost the amount you give (as in the second dot-point in example 2, above) without affecting your cash flow, it may still make sense to distribute income to the non-profit direct from the trust.
Before donating to a charity or other non-profit you need to check whether your trust deed permits you to do so. You may well find that the class of beneficiaries of the trust already includes “any charity”. A sporting club or even a Church will not normally qualify as a “charity”, however. And off-the-shelf trust deeds do not normally include non-profits other than charities as potential beneficiaries. If your favourite non-profit does not fall within a class of beneficiaries in your trust deed it is normally a simple, cost-effective matter to have the deed amended to add them as a beneficiary.
You must ensure that your family trust makes any distribution to non-profits (and indeed all other income distributions) on or before 30 June each financial year. The trustee will be taxed at the top marginal rate on any income not distributed by that date.