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Private Companies and Discretionary Trusts – How can these Affect your Retirement?

Discretionary trusts and private companies are used extensively by small and medium sized business owners and families, and have been proven to provide tax effective strategies during business and working lives. However, there are implications in retirement around means testing, including for pensions and fees for aged care.

Case Study

In a recent case, a retired couple had a discretionary trust with $10 in recorded net assets. Despite this figure, the “Special Assessments Area” of Centrelink assessed the asset value for means testing at around $160,000. The couple didn’t get any clarity of how the value was arrived at and getting information was, and is, difficult.

This couple were seeking to do part time work to supplement their age pension – the complexity and assessment rules in them having in place a discretionary trust created significant issues that impacted on their means-tested benefits.

If there are private companies or trusts involved when applying for means-tested pensions or benefits, then the assessment is referred to the Complex Assessments section where a “Complex Assessment Officer” makes the assessment. The assessors scrutinise the details and history of the structures for 5 years or more. In this particular case the Special Assessments Area of Centrelink took approximately a year to make an assessment on the discretionary trust about the value of assets in the trust. Repeated requests were made for more information as the department sought to delve deeply into what was a fairly standard discretionary trust structure. One government audit report indicated that Complex Assessments made up about 8 percent of all aged pension assessments.

Potential Issues

Control test

When applying for means-tested benefits, scrutiny is applied to determine who is “attributed” the assets, and corresponding income. This can be an appointor, trustee, beneficiary or someone who might be considered to have influence. If a person is assessed to have control then they will be deemed a controller and have a portion or all of the assets and income attributed to them.

Retirees may pass on the benefits of the trust to others such as family but then find themselves still assessed as having control. This is a big problem.

Source test

If assets are loaned into a trust then they can have the effect of the trust asset being counted as an asset of the individual and the loan being counted a financial asset under the deeming rules in the hands of the individual. In other words, the asset is counted twice.

Trust income

• Trust income is calculated for the following twelve months for the purposes of calculating means-tested pensions and fees. If trust income is then greater than that assessed the previous twelve months then there may be a requirement to repay some or the entire pension. In comparison salary and wage earnings are assessed each fortnight corresponding to that pension period.
• Trust income may be apportioned 100% to the controller(s) even if the distributions are to other beneficiaries with the amount distributed to the other beneficiaries deemed a gift and subject to deprivation rules.
• Deeming provisions don’t apply and only actual income is assessed. This is a significant planning matter to determine a positive or negative factor in means testing.

Changing Trusts and Deprivation

Attempts made to change control or structure of assets within the trust, may deem assets and corresponding income to be gifted and subject to deprivation rules where some or all of the assets and income are still counted in means testing for 5 years.

Beneficiary of a trust you don’t control

Retirees may be beneficiaries but not have control over a trust. For example as part of an adult child’s tax strategy. This can be problematic for the retirees when looking at means testing where income is distributed via the trust.

How can you plan for this in retirement?

The above points are merely a few of the issues and complexity around discretionary trusts and private companies.

To plan for retirement where there are trusts or companies in place, the key is to start planning at least 5 years out from retirement where possible. Involve professionals to get good advice and develop a strategy that deals with the structure and history of the trusts and companies; income and assets needs in retirement; means testing issues; and welfare and benefits options. Remember to review your circumstances regularly and update planning where required with your financial advisor.

Give us a call today on 08 9301 2200 or visit www.mckinleyplowman.com.au/services/wealth to see how we can help you put the right plans in place for a comfortable and well-funded retirement – with no nasty surprises!

Adapted from Primetime’s Media Release “Longer term forward planning a must for retirees who have private companies and discretionary trusts”, Peter Tyndall, 1 November 2018 www.primetime.net.au

written by:

Aaron McCracken

Aaron has over twenty years of experience in the financial services industry working with large companies and small businesses across all aspects of financial planning. He has broad experience across superannuation (including self-managed superannuation), investments, estate planning and personal insurance, retirement planning and business succession planning.
Aaron is passionate about the value of professional, client-focused advice and enjoys working closely with clients to help them make smart decisions with their money, as well as aiding them to clarify and achieve their financial aspirations.