Solicitors Opinion about Trusts

26 July 2002

FACCS

Re: Trusts

As discussed, we set out below a brief explanation of the use of trusts. However, there are complex taxation and other laws relating to trusts. Accordingly, the following outline should not be used as a substitute for professional advice.

Outline of Trusts

1. What is a Trust?

If a person receives any money or property on behalf of another person, this creates a trust. It is this relationship between the person receiving the money or property, and the person for whose benefit it is held that is described as a trust. The person holding the money or property is referred to as "the trustee", the persons for whose benefit the money or property is held are referred to as "the beneficiaries" and the person who initially provides the money or property is referred to as "the settlor".

To establish a trust, generally, a small amount of money is paid to the person or company who will be acting as the trustee, to be held by the trustee for the benefit of the beneficiaries.

2. Trust Fund

Once a trust is established in this way, further substantial money or assets are transferred to the trustee, to add to the small amount of money the trustee initially received from the settlor. Those assets, together, are referred to as "the trust fund". The assets which form part of the trust fund are often income producing assets, such as shares or a business. The income which these assets earn are added to and form part of the trust assets.

3. Trust Deed

A trust deed is a document signed by the trustee, in which the trustee agrees as to how the trustee will deal with the trust fund. The trust deed is, in effect, the constitution of the trust.

4. Distribution

The trust deed will provide that the trustee can make distributions to the beneficiaries from time to time. Usually, the income earned from the trust fund will be distributed between the beneficiaries at the end of each financial year.

5. Taxation

Under Australian taxation law, a trust is a taxpayer, separate from the trustee, and separate from the beneficiaries. Accordingly, if a company is a trustee of a trust, the company will be required to lodge one taxation return for itself, and a separate taxation return for the trust.

The rules as to the taxation of trusts are very complex. The income of a trust is generally passed on to the beneficiaries. In that case, the trust pays no tax, but the beneficiaries are required to include the income which they receive from the trust in their own taxation returns.

Advantages of Trusts

1. Protection of Assets

Persons may wish to establish a trust to hold assets, to protect those assets against claims by creditors or claims arising from a breakdown of a marriage or a defacto relationship. However, there are provisions of the Bankruptcy Act enabling a trustee in bankruptcy to have access to assets placed into a trust within 2 years prior to the date of bankruptcy, or 5 years, if the bankrupt was insolvent at the time of placing the asset into the trust. Also, the Family Court, in determining property settlement, will generally take into account assets held in a trust.

Often, parents are concerned that money or property given to a child may be wasted. Accordingly, they may wish, instead, to place the money or property into a trust for the benefit of the child.

Gifts under a will can also be left to a trust, rather than directly to a beneficiary. This gives effective protection from the possibility of assets being lost under the Bankruptcy Act, the Family Law Act or the de facto relationships legislation.

2. Taxation

A trust can be useful for splitting income. Accordingly, a person who is running a profitable business may wish to run the business through a trust, with the personís spouse and children as beneficiaries. In that way, the lower income tax rates payable by the spouse and children can be preferable to all of the income being attributed to the person running the business.

As each case may be different, careful consideration needs to be given to this in each individual case.

Types of Trust

1. Discretionary Trusts

Most trusts are established to benefit the family of the person who establishes the trust. In this case, the trust is usually a discretionary trust. This means that the trust deed will give a trustee a discretion as to dividing the income and assets of the trust between the beneficiaries, who are generally the members of the family and other related persons and companies.

For example, a person may operate a profitable business through a discretionary trust, in which the beneficiaries are that personís family. At the end of each year, the income is calculated, and a decision is made as to how much of the income will be credited to each member of the family, so as to pay the minimum amount of taxation.

Where there is a discretionary trust, there will almost always be a person who has the right to hire and fire the trustee. This person, known as "the appointor" in effect, controls the trust. Accordingly, when a person wishes to place that personís money or assets into a trust, the trust will be established so that that person is the appointor, thereby maintaining control over the trust.

2. Unit Trust

With a unit trust, the entitlement to income and assets is determined according to the number of units each beneficiary holds in the trust. This is a much more rigid structure than for a discretionary trust.

A unit trust will be appropriate where, for example, a business is run by 3 unrelated people. In that case, a unit trust would be established, in which each person holds an agreed number of units.

Holding units in a unit trust is similar to holding shares in a company. Subject to the rules set out in the trust deed, such units may be sold, or bequeathed by will.

3. Superannuation Trust

A superannuation trust is a trust established for the benefit of beneficiaries upon retirement. Provided that such trusts comply with the relevant rules, substantial income tax benefits are provided to the beneficiaries upon putting money into the trusts, to the beneficiaries upon receiving money from the trusts, and to the income earned by the trusts.

The rules which must be complied with in order to obtain favourable taxation treatment are very complex, and frequently changing. Accordingly, it is essential to obtain careful specialist advice when establishing a superannuation trust.

We hope that the outline set out above has been helpful. If you require any further information, please do not hesitate to contact us.