FAQ
How Discretionary Trusts Work
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
- What is a Discretionary family trust?
- Why do we need a trust deed?
- Role of Settlor
- Role of appointor
- Role of Trustee
- Role of beneficiary
- Advantages of having a company as a trustee
- Duties & Powers of Trustee
- Advantages of Discretionary Trust
- Disadvantages of a family trust?
- Whose name are assets held by a family trust?
- Vesting of Trust
- Is any stamp duty payable on creation of trust
What is a Discretionary Family Trust?
Order NowA trust is established for a family with a payment of an amount, called "settled sum" by the settlor to the trustee to be held in trust in accordance with the deed for the benefit of the beneficiaries. Many business owners prefer to run their businesses under atrust structure due to the many advantages that it offers over other structures
A family discretionary trust is where the beneficiaries are all predominantly family or related members of the same family and the trustee has full discretion which beneficiary gets which distribution portion of income or capital of the trust.
The trustee owns the property of the trust and distributes each year; income of the trust, to various family members with a common purpose. This common purpose includes minimizing the total income tax to be paid on trust's net income.
The trust runs for 80 years or earlier, this termination date is called "vesting day", when beneficiaries are entitled to the whole of the trust fund. Until that day, the trust assets are held by the trustee.
A Discretionary trust which makes a family trust election is known as Discretionary Family Trust. We sell online Discretionary trust deed where the trustee can make a family trust election with the ATO.
Why do we need a trust deed?
Order NowTrusts are created by a legal document called a "trust deed" prepared by a solicitor which outlines the purpose of the trust, the rights and obligations of the trustees and beneficiaries, powers of the trustee, and identifies various parties such as initial Beneficiaries, Trustee(s) & Appointor
Role of Settlor
Order NowA trust is created by "declaration of trust" on property of the trust or by payment of settlement of money by a person called the "settlor" to the person called the "trustee", to deal with trust funds as provided in the deed of settlement.
Care should be taken that Settlor of a Discretionary Trust is an independent person. Settlor cannot be a trustee and can not be a beneficiary of the trust and nor his spouse or children be beneficiaries.
A trustee of trust or a beneficiary cannot act as settlor. The settlor is usually a friend or accountant who helps the client to establish the Discretionary trust. The settlor has no right to income or capital of the trust assets and once the settled sum has been paid by the settlor and trust deed has been executed, it will have no further role in the trust.
When property is transferred to the trust from a family member, as settlement money, there could be stamp duty & capital gain tax issues, care should be taken to decide this amount. Usually this amount is below duty amount and is only $10.
Role of appointor
Order NowThe appointor can remove / replace trustee. The appointor "in de facto" controls the trust, since, if the trustee does not follow the appointor's directions, the appointor can simply remove the trustee and appoint another trustee
Although it is not necessary to name an appointor but to handle the situations arising from the death or insolvency of trustee(s), naming an appointor is considered advisable. The "initial appointor" is usually mentioned in a schedule to the trust deed. The deed allows appointor to resign and nominate another person(s) as appointor in his or her place. If an appointor dies without making such a nomination then the deceased appointor's legal personal representative can become an appointor of the trust till such time that another appointor is appointed.
Role of Trustee
Order NowTrustee is appointed by Settlor with powers contained in the trust deed. Trustee owes a duty of care of "good faith" to the beneficiaries and the deed requires that all trustee(s), at all times, act in best interests of all beneficiaries.
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 appointor or to all beneficiaries.
Trustee(s) are responsible to look after trust funds by investing & managing it and distributing to various beneficiaries at the end of the financial year. They must also maintain books of account and lodge relevant income tax returns with the tax office.
Who should be Trustee?
Trustee can either be one or few individual(s) or a company. Individual trustee(s) should not be below 18 years of age and should not be a disqualified person(s). If trustee is a company, its affairs are controlled by its directors and eventually by its shareholders by virtue of their power to appoint or remove directors.
Usually family members of a discretionary trust incorporate a (new) company to act as a trustee and nominate various family members as beneficiaries. Where there are not enough family members to reduce total tax to be paid by the family on trust income, advisors may recommend that (another) company is incorporated and appointed as a beneficiary (see below), so that tax is paid on trust income at company tax rate instead of higher Individual marginal tax rate.
Individual trustee(s) can also be beneficiaries, however, most advisors would prefer a company to act as trustee of the trust and family members (who can also be directors of the trustee company) are beneficiaries of the trust.
There is no rule that Individual trustees cannot also be beneficiaries, but since trustee(s) are to be seen to act in the benefit of ALL beneficiaries, having one or few Individual beneficiaries as trustee(s) may break that fiduciary duty of trustee(s). Hence many advisors prefer a company to act as trustee.
Warning
When there is only one individual trustee and the same person is also the sole beneficiary of the trust, this situation can lead to an invalid trust as a person can not hold an asset on trust for his or her own benefit. In such a situation, alternate structure can be considered such as a new company to act as a trustee with sole director then that same person can be the sole beneficiary of the trust.
Role of Beneficiary
Order NowA beneficiary is a person for whose benefit the trustee holds trust property. In most trust deeds "initial beneficiaries" are noted in a schedule and are usually family members or other close relatives. There are classes of beneficiary who can be parents, grandparents, brothers, sisters, children, grandchildren, aunties, uncles, nephews, and nieces of initial beneficiaries. You can also have a related company or a charity as a class of beneficiary. You must be careful in nominating another trust as beneficiary of the original trust as predominately income of the trust must remain in the family, other trusts may have other beneficiaries who are not family members of the original trust.
The root benefit of a discretionary trust is to distribute income of trust to beneficiaries who are likely to pay the least amount of income tax.
Due to this trustee's discretion, the beneficial ownership of assets of the trust does not pass to any beneficiary till "vesting date".
Trustee has legal ownership but not beneficial ownership of trust assets. Hence, even if a beneficiary becomes insolvent, his creditors cannot claw back assets of the trust.
Advantages of having a company as a trustee
Order NowBesides 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 beneficiaries in their individual capacity whilst still being in control of the trust.
Duties & Powers of Trustee
Order NowTrustee 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.
- 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.
Advantages of Discretionary Trust
Order NowFamily 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.
Income Tax Advantages
- Net income in a financial year can be distributed amongst beneficiaries in a way which minimizes total income tax payable by the family unit. This distribution has to be included in the beneficiaries' 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 2010 and distributed to the beneficiary on 15th August 2011, this income has to be included in the beneficiaries income tax return for the financial year ended 30th June 2010 and not 2011.
- 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 beneficiary's income tax return and any imputation credit or foreign tax credits flows through to the beneficiaries as per trustee's discretion.
- If beneficiaries are under 18 years of age, by distributing income to them, trustees can avail their tax free threshold and low income rebates.
- If there are no individual beneficiaries in marginal tax rate lower than company tax rate (at the time of writing 30%), then trustees can distribute income of the trust to a (new and not trustee) company and pay tax on income at the company tax rate.
- 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 the beneficiaries when distributed on vesting date. Unpaid present entitlements can be an issue in some cases, we recommend that you speak to a suitably qualified solicitor or accountant.
- Only net income of the trust has to be distributed, a trust can also contribute superannuation for a beneficiary, which means that tax on income of the trust can be limited to tax rate on contribution to superannuation which at the time of writing is 15%.
- If a trust has a loss and has received imputation credits in the financial year, the trust can lodge its own income tax return and carry forward the loss to the next financial year and claim a refund of imputation credits.
Capital Gain Tax Advantages
- 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 through to beneficiaries' on distribution.
- If trustee distributes trust assets to a beneficiary, capital gain event triggers and the trustee will be deemed to have sold the asset to the beneficiary at its market value. This capital gain can be allocated / distributed to the same beneficiary or to another beneficiary with the discount factor if applicable.
Asset Protection Advantages
- One of the main features of a family discretionary trust is its asset protection capability. Assets which are held in a trust fund for the benefit of a particular person(s) as distinct from assets directly owned by him/them are automatically protected from that person's creditors. This can be very important in certain professions like doctors, lawyers and accountants or those who are prone to litigation or in situations where business venture may become bankrupt.
- Assets which are being held in a trust fund prior to marriage, for the benefit of a one party can similarly have advantage in matrimonial disputes.
- For estate planning purposes, if a person has already become bankrupt, assets passing on to him directly, say, from his parents, will straight away become available to his trustee in bankruptcy proceedings. However if assets are passed on to a discretionary trust established for the benefit of him and his family and the trustee of that discretionary trust can ensure that the distributions to that person can be timed in a manner consistent with expiry of bankruptcy period, these assets can be protected from the bankruptcy proceedings
However, family courts in certain situations are known to have 'seen through' the trust arrangements and allocated assets held in a trust amongst spouses. Likewise, few recent cases have raised the possibility of a trustee in bankruptcy accessing the assets in a discretionary trust over which the bankrupt beneficiary has 'de facto' control, we recommend that you take your own legal advice.
Other Advantages
- Any distribution to a beneficiary need not be physically paid to them. If the beneficiary agrees, trustee can retain money which it has decided to distribute to beneficiary and establish a bare trust for that beneficiary within the family trust. The trustee can then invest that money on behalf of the beneficiary as per powers given to them by the trust deed.
- Money's belonging to beneficiaries 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 beneficiary 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.
- Can safeguard certain social security payments for beneficiaries.
Disadvantages of a family trust
Order NowDisadvantage of operating with a 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.
Whose name are assets held by a family trust?
Order NowThe 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 right, but as a legal 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.
Vesting of Trust
Order NowAfter 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 beneficiaries.
Is any stamp duty payable on creation of trust
Order NowIf a trust is created over an identifiable dutiable property, generally full duty is payable calculated on the value of the dutiable property identified in the trust deed. Where the trust contains different types of dutiable property for which different rates of duty apply the trust instrument will be chargeable with duty as if a separate instrument had been created for each type of dutiable property. However, if a trust is established over an unidentified or non dutiable property normally concessional rate of duty or nil duty is applicable.
How Unit Trusts Work
Information here may help you as a guide to provide general overview of operation of a unit trust and explain the commercial advantages and disadvantages of conducting business or investing with a unit 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 unit 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
- What is a Unit trust?
- Why do we need a trust deed?
- What is a unit ?
- Role of Trustee
- Advantages of having a company as a trustee
- Duties & Powers of Trustee
- Advantages of Unit Trust
- Disadvantages of a Unit trust?
- Whose name are assets held by a Unit trust?
- Vesting of Trust
What is a Unit trust?
Order NowA 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.
Why do we need a trust deed?
Order NowTrusts 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.
What is a unit?
Order NowA 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.
Role of Trustee
Order NowTrustee 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.
Who should be trustee ?
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.
Who controls a unit trust ?
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.
Advantages of having a company as a trustee
Order NowBesides 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.
Duties & Powers of Trustee
Order NowTrustee 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.
Advantages of Unit Trust
Order NowUnit 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.
Income Tax Advantages
- 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.
Capital Gain Tax Advantages
- 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.
Asset Protection Advantages
- 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.
Disadvantages of a Unit trust
Order NowDisadvantage 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.
In whose name are assets held by a Unit trust?
Order NowThe 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.
Vesting of Trust
Order NowAfter 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 beneficiaries.
How Fixed Unit Trusts Work
Information here may help you as a guide to provide general overview of operation of a Fixed Unit trust and explain the commercial advantages and disadvantages of conducting business or investing with a fixed unit 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 fixed unit 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 in detail. 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; we do not know if a fixed unit trust will suit your purpose, as we do not know your purpose, readers should consult a qualified legal practitioner or accountant for advice.
Click on the points below to read more information
- What is a Fixed Unit trust?
- Why do we need a trust deed?
- What is a unit ?
- Role of Trustee
- Advantages of having a company as a trustee
- Duties & Powers of Trustee
- Advantages of Fixed Unit Trust
- Disadvantages of a Fixed Unit trust?
- Whose name are assets held by a fixed unit trust?
- Vesting of Trust
What is a Fixed Unit trust?
Order NowA 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 fixed 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 fixed 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. No income of the trust can be accumulated in the trust. All income of the trust must be distributed each year.
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 fixed 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.
This fixed unit trust can be terminated by the unit holders in a special meeting. On termination, all assets are distributed to unit holders according to the units held by them on termination date.
Why do we need a trust deed?
Order NowTrusts 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.
What is a unit?
Order NowA 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 fixed 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 fixed unit trust confers on the unit holder an equitable interest in both the underlying capital and the income of the trust.
Role of Trustee
Order NowTrustee 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.
Trustee(s) are responsible to look after trust funds by investing & managing it and distributing to various unit holders at the end of the financial year. They must also maintain books of account and lodge relevant income tax returns with the tax office.
Who should be trustee?
Usually unit holders of the fixed 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.
Who controls the fixed unit trust?
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 75% unless the unit holders decide otherwise.
Advantages of having a company as a trustee
Order NowBesides 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.
Duties & Powers of Trustee
Order NowTrustee 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.
Advantages of a fixed unit trust
Order NowFixed 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.
Income Tax Advantages
- 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 of a fixed unit trust must distribute all income of the trust and cannot accumulate income of the trust.
- 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 the fixed unit 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 - various income tax, asset protection and estate planning advantages connected to family trusts are also available to unit holders.
Capital Gain Tax Advantages
- On disposal of any asset of the trust, all unit holders are 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 of capital income.
Asset Protection Advantages
- 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 fixed 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 fixed unit trust, can be held by the trustee, under a bare trust arrangement, 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.
Land Tax
- This fixed unit trust is treated as a "fixed unit trust" within the scope of Land Tax legislation in many states. What this means is that this fixed trust will receive threshold available to trustees who own land under this trust deed structure.
- For example Section 3A Land Tax Management Act 1956 of NSW states a trust is a "fixed trust" if equitable estate in all of the land that is the subject of the trust is owned by a person or persons who are owners of the land for land tax purposes and equitable interest of the trustee as trustee of the trust is to be disregarded. That means that the persons who are beneficiaries of the trust (unit holders) under the trust deed are taken to be the owners of an equitable estate in the land that is subject to the trust.
- This equitable interest is created because this trust deed specifically provides that the beneficiaries of the trust are presently entitled to the income of the trust and capital of the trust and can require the trustee to wind up the trust and distribute the trust property to the unit holders.
Disadvantages of a fixed unit trust
Order NowDisadvantage of operating with a fixed unit trust structure is that
This trust cannot distribute capital or revenue losses to its beneficiaries. Which means that any losses have to be carried forward till a profit is achieved. 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, may be wise to have debt held at the unit holder level, rather than at the trust level, to avoid negative gearing type losses being locked up in the trust.
In a Fixed Unit Trust there is no discretion with the trustee as all income of the trust has to be distributed to the unit holders. This means, that all income of the trust cannot be accumulated and has to be distributed to unit holders even in a financial year when a unit holder has high taxable income. A fixed unit trust cannot accumulate income and pay tax in its own right.
In whose name are assets held by a Unit trust?
Order NowThe 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.
Vesting of Trust
Order NowAfter 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).
In a Fixed unit trust, the unit holders also have a right to terminate the trust and may request the trustee to wind up the trust and distribute the trust's property to all unit holders.
How witness signing works
- Who can be a witness for signing trust documents in Australia?
- Can a beneficiary or trustee act as a witness for signing trust documents?
- Why do I need a witness to sign my trust document?
- Do witnesses need to know the contents of the trust document they are witnessing?
- Do witnesses need to be present during the entire signing process of trust documents?
- Can witnesses sign trust documents electronically in Australia?
- What happens if the witness requirements for signing trust documents are not met?
Who can be a witness for signing trust documents in Australia?
Order NowIn Australia, witnesses must be adults (18 years or older) and not parties to the trust document. They should also be mentally competent and understand the nature of the document they are witnessing.
Can a beneficiary or trustee act as a witness for signing trust documents?
Order NowNo, beneficiaries and trustees should not act as witnesses for signing trust documents in Australia to avoid any conflicts of interest or questions regarding the document's validity.
Why do I need a witness to sign my trust document?
Order NowWitnesses are required to ensure the validity and authenticity of the signatures on the trust document. They provide independent verification that the signatories have indeed signed the document.
Do witnesses need to know the contents of the trust document they are witnessing?
Order NowWhile it's not a strict legal requirement for witnesses to know the contents of the trust document, they should witness the signing in good faith and understand that they are attesting to the authenticity of the signatures.
Do witnesses need to be present during the entire signing process of trust documents?
Order NowYes, witnesses should be physically present during the signing of the trust document by the parties involved. They must observe the signatures being made and then sign the document themselves in the presence of the signatories.
Can witnesses sign trust documents electronically in Australia?
Order NowGenerally, electronic signatures are accepted in Australia, but the requirements may vary depending on the jurisdiction and specific circumstances. It's advisable to seek legal advice to ensure compliance with relevant laws and regulations.
What happens if the witness requirements for signing trust documents are not met?
Order NowFailure to adhere to the witness requirements may lead to challenges regarding the validity of the trust document. It's crucial to ensure compliance with legal requirements to avoid potential disputes or complications in the future.
CLIENT TESTIMONIALS
I have been using Trust Deed dot Com for quite some time now and find their service second to none. Their order forms are easy to navigate with hints & tips along the way. Their post order review of (particularly) Trust Deeds is a valuable and very much appreciated free service!
Joan Drew
B.Bus FIPA
Joan L Drew & Associates (Public Accountants / Registered Tax Agents)
As a accountant, we rely on the strength of a professional firm to keep us up to date with the latest changes and all other relevant matters. You & your team at trustdeed.com provide us with prompt, efficient services.
Dickson Hong
CPA
Registered Tax Agent
Registered ASIC Agent
TAXATION BUSINESS SERVICES
JOIN US
Learn how to grow your wealth and pay less tax.
Our Wealth Creator writers reveal the secrets of how to easily reduce tax and create more wealth. Once you learn these simple but ingenious strategies, it will be like giving yourself a 20% pay rise, tax free!
More Information
How to use our service?
Phone : 02 9684 4199
Email : sales@trustdeed.com.au
Our trust deeds
We will arrange for you to speak with Batallion Legal, free of charge
Specific legal advice
Batallion Legal will charge for this service. Please visit http://www.batallion.com.au
Register/Login Now
New User
To purchase anything from our website you need to register once, - registration is free.
Register NowExisting User
Log in now to order a new document
Login