Don’t want your kids to have to pay back their student loan while still studying? Do you want to prevent your children being provisional tax payers? Don’t want your child missing out on a student allowance? If you answered yes to any or indeed all of the above, then read on to understand how and why we can help.
Let’s take an example. A family trust has made a net profit of approximately $20,000. The accountant decides rather than paying tax at 33%, which is the flat trust tax rate, to distribute the income to the settlor’s son. He is 19 and studying at university. The rationale behind this is to take advantage of the son’s lower tax rates of 10.5% and 17.5%, an overall saving of $4,080 in income tax payable. Let’s dive deeper and examine what evils lurk beneath this seemingly advantageous distribution.
The son is liable to make student loan repayments on a portion of the amount distributed, and on all “pocket-money” earnings from his part-time job, all while still studying!
The son has not received any tax credits on the income distributed. However, he is now deemed to be a provisional taxpayer for the forthcoming tax year. The situation also creates unnecessary compliance and potential tax payments for the following tax year! Furthermore, the son is deemed to have an income of $500 a week, taking account of the distribution and his part time job, so he no longer qualifies for student allowances of $140 per week!
But wait, that’s not all. Let’s continue….
The trust owes the son $20,000 because he has never actually received the distribution. It was just an entry on the tax return. Furthermore, the trust is at the mercy of the son who can now legally demand the trust pay this amount to him. Can you see this problem could snowball over some years if similar amounts are declared as distributions? This could leave a major issue for the trust, in particular, if there were ever a “falling out” amongst family members.
So, simply put, if you don’t want your kids paying back their student loans while they’re still studying and you want to prevent your children being provisional tax payers and you don’t want your child missing out on a student allowance then here are the solutions:
- Make sure your accountants explain in detail what they are doing for you when preparing your trust accounts and tax returns.
- Ensure they provide specific details of the implications of everything they do.
- Better still, have Prudentia Law be part of the compliance process. We can check accounts and tax returns to ensure everything is handled appropriately. This is most important if we act as the independent trustee of your trust.
Interested in knowing more or want to speak to us about a specific situation, then contact us today.
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