Information here may help you as a guide to provide general overview of
operation of a discretionary trust and explain the commercial advantages and
disadvantages of conducting business or investing with a Family discretionary
trust structure.
There are many tax planning, asset protection and distribution of wealth issues
which must be considered before a decision is made to establish a family trust.
Those who intend using this tax structure, information contained herein should
be taken as starting point of their investigation.
Many accounting and legal matters, such as, stamp duty and land tax, have not been addressed here. We are not in a position to advice you, trustees and beneficiaries should read the trust deed to better understand their rights, powers, obligations and duties. This guide is not intended to replace any legal advice; readers should consult a qualified legal practitioner for advice.
Click on the points below to read more information
A trust is established for (usually) un-related parties
with a payment of an amount, called “initial sum” by the initial unit
holders to the trustee to be held in trust in accordance with the deed
for the benefit of the unit holders.
A unit trust is a trust where the rights of the beneficiaries (unit
holders) to income and capital are fixed. This is in the sense that they
are not subject to any discretions on the part of a trustee, and are
unitized, in the sense that those rights are divided amongst the
beneficiaries based on how many units have been issued to them.
A unit trust is where the unit holders, who are all predominantly
un-related members of two or more separate families getting together to
hold an asset together (usually a large property or shareholding) or run
a business together. The trustee has no discretion on which unit holder
gets which distribution portion of income or capital of the trust. All
income and capital is distributed according to unit holding.
The trustee owns the property of the trust and distributes each year;
income of the trust, to various unit holders with a common purpose. This
common purpose includes minimizing the total income tax, capital gain
tax and asset protection.
The trust runs for 80 years or earlier, this termination date is called
“vesting day”, when unit holders are entitled to the whole of the trust
fund according to their unit holding. Until that day, the trust assets
are held by the trustee.
In a unit trust all units have the same rights to income and capital
distribution and voting rights in a meeting.
There is another type of unit trust known as “Hybrid unit Trust” aka
“Hybrid Discretionary Trust” where there are various types of units or
different classes of units issued to unit holders. These different units
have different rights to income and capital distributions and voting
rights. These rights are determined at the time the units are issued or
as otherwise agreed by the unit holders and the trustee. In some cases
hybrid unit trusts give trustee’s discretions as to distribution of
income and capital of the fund to various classes of unit holders.
Trusts are created by a legal document called “trust
deed” prepared by a solicitor which outlines the purpose of the trust,
the rights and obligations of the trustees and unit holders, powers of
the trustee, and identifies various parties such as initial unit holders
& Trustee(s).
For a trust to exist four elements must be present. These are:
a trustee;
a beneficiary, (called in the case of a unit trust, a “unit holder”);
trust property; and
an equitable obligation on the part of the trustee to hold the
property for the benefit of the beneficiary.
Most Australian businesses are carried on in trusts. Trusts can be
small, or they can be very large: some of the managed investment unit
trusts have more than 20,000 unit holders or beneficiaries.
A unit is a piece of property that entitles the unit holder to a
specified proportion of the income and capital of the trust.
A unit held under a trust is different from a share in a company. A
share confers on the holder no legal or equitable interest in the assets
of the company; Units under the trust deed confer a proprietary interest
in all the property which is subject to trust of a deed.
In other words, a unit in a unit trust confers on the unit holder an
equitable interest in both the underlying capital and the income of the
trust.
Trustee is appointed by unit holders with powers
contained in the trust deed. Trustee owes a duty of care of “good faith”
to the unit holders and the deed requires that all trustee(s), at all
times, act in best interests of all unit holders.
Trustee may be held personally liable for debts incurred in their
capacity as a trustee but have the right to be indemnified out of the
assets of the trust. A trustee can resign if he / she so wishes by
giving notice to all unit holders.
Usually unit holders of the unit trust
incorporate a (new) company to act as a trustee and nominate various
unit holders as directors of the company.
Individual trustee(s) can also be unit holders, however, most advisors
would prefer a company as trustee of the trust and unit holders (who can
also be directors of the trustee company) are beneficiaries of the
trust.
There is no rule that Individual trustees cannot also be unit holders,
but since trustee(s) are to be seen to act in the benefit of ALL unit
holders, having one or few Individual unit holders as trustee(s) may
break that fiduciary duty of trustee(s). Hence many advisors prefer a
company to act as trustee.
The unit holders as a group control the trust. This is
because the trust deed gives them the power to direct the trustee and if
necessary, dismiss the trustee and appoint another person to act as the
trustee instead.
The deed specifies the percentage vote required for a resolution of a
meeting of unit holders to be effective. Usually it is 50% unless the
unit holders decide otherwise.
Besides fiduciary duty advantage as listed above,
following are other benefits of having a company as a trustee:
Assets of the trust are held in the name of trustee(s), if trustee
is a company then private assets of Individual trustees generally cannot
be confused as trust assets;
In case of death of individual trustee all assets of the trust have
to be again transferred in the name of new individual trustee, however
if a company is a trustee, there is no change of ownership of assets
even in case of death of director of trustee company;
The directors of Trustee Company can be unit holders in their
individual capacity whilst still being in control of the trust.
The disadvantages of using a company as trustee are largely the extra
cost of setting up and running a company each year.
Trustee must act in “Good faith” whilst handling trust
affairs, this means that trustee must put interest of the trust ahead of
his or her personal interest and act in a manner a person would in
dealing his or her own personal assets.
Below are some duties of
trustees:
follow the trust deed;
hold assets of the trust and manage its investments;
engage experts for benefit of the trust;
delegate duties to a competent persons, however the trustee is still
responsible for delegated tasks;
invest trust’s assets in accordance with law and as per the trust
deed;
to maintain proper books of accounts including minutes of meetings
of the trustees/directors of the trustee company, lodge returns with ATO;
and
to keep the trust’s assets separate from other personal assets.
Unit trusts structure has many advantages over other
tax structures like, partnership, company etc, however it has its own
limitations. Below is a list of advantages, please note that this list
is not exhaustive, you must seek your own independent legal and
accounting advice.
Net income in a financial year is distributed amongst unit holders.
This distribution has to be included in the unit holders’ income in the
financial year when the trust has earned the income and not the year
when the income is distributed, e g, trust income of $10,000 is earned
in financial year ended 30th June 2000 and distributed to the
beneficiary on 15th August 2001, this income has to be included in the
beneficiaries income tax return for the financial year ended 30th June
2000 and not 2001.
The classification of trust income, for example, dividend income,
foreign income, or capital gain continues to be recognized under the
same classification in the individual unit holder’s income tax return
and any imputation credit or foreign tax credits follows through to the
unit holder as per trustee’s distribution.
If unit holders are under 18 years of age, by any income
distribution to them, trustees can avail their tax free threshold and
low income rebates.
If unit holder is a company the company will pay tax at company tax
rate (at the time of writing 30%).
The trustee can decide not to distribute any income of the trust and
instead accumulate income of the trust. The trustee is liable to pay tax
on the net income of the trust at the highest Individual tax rate.
However, the commissioner of taxation has the discretion to charge tax
rates applicable to an individual of an identical amount. When income is
accumulated, it forms the part of the trust fund and not taxable to unit
holders when distributed on vesting date.
Only net income of the trust has to be distributed, a trust can also
contribute superannuation for all unit holders in proportion to their
unit holding, which means that tax on income of the trust can be limited
to tax rate on contribution to a superannuation fund, which at the time
of writing is 15%..
If a trust has a loss and has received imputation credits in the
financial year, the trustee can lodge its own income tax return and
carry forward the loss to the next financial year and claim a refund of
imputation credits.
If units are owned via family trusts the various income tax, asset
protection and estate planning advantages connected to family trusts are
also available to unit holders.
On disposal of any asset of the trust, it is entitled to a 50%
discount factor on capital gains, if assets are disposed after one year,
this discount flows throw to unit holders’ on distribution.
Any distribution to a unit holder need not be physically paid to
them. If the unit holders agree, trustee can retain money which it has
decided to distribute to unit holders and establish a bare trust for
that unit holder within the unit trust. The trustee can then invest that
money on behalf of the unit holder as per powers given to them by the
trust deed.
Money’s belonging to unit holders who are under a legal disability,
like minors distribution money from a trust, can be held by the trustee,
in trust, till they reach 18 years of age. The trustee may apply money
held for minor unit holder in payment of education, clothing and other
similar expenses which are for maintenance, education or benefit of
minor beneficiary. Alternatively, trustees can distribute minor’s money,
to their parent or guardian.
Disadvantage of operating with a unit trust structure
is that it cannot distribute capital or revenue losses to its
beneficiaries.
Hence, when a trust incurs a loss beneficiaries are not able to offset
that loss against any other assessable income that they may derive from
other sources such as salary, interest, dividend etc.
As a result, should a trust incur a net loss its beneficiaries, it may
be wise to have debt held at the unit holder level, rather than the
trust level, to avoid negative gearing type losses being locked up in
the trust.
The trustee is the legal owner of trust’s property.
This means that trustee’s name should appear on all ownership documents,
such as shares, managed funds, property etc. However, this ownership of
asset is not in their “own benefit”, but as a beneficial owner, on
behalf of the trust.
Hence, wherever applicable, assets ownership documents should carry the
tag
“ In Trust For”, or ITF or “As Trustee For” ATF, e. g the owner of the
trusts share can be either “Mr R Smith ITF Smith Family Trust” , in case
of individual trustee or “R Smith Pty Ltd ATF Smith Family Trust” in
case of company trustee.
In some instances, above name cannot be inserted in the ownership
documents, as most land title offices do not recognise a trust and will
only register title of property in the name of the trustee only, who
will be the legal owner of the property. The land titles will not allow
the above tag.
In these circumstances, property has to be registered in the name of
Individual Trustee or company trustee wherever relevant. Some advisors
recommend drawing up a separate “declaration of trust” deed for each
such asset.
After 80 years of creation date, or earlier, if the
trustee decides, the trust will “vest” or cease. The trustee will on
“vesting date”, put together all the trust’s property, its capital and
distribute to all unit holders (beneficiaries).
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