There are more than 800,000 trusts in Australia with assets totalling more than $3 trillion. But what is trust?
What is a Trust
Trusts are created under the law of equity. Unlike a company, a trust is not a separate legal entity. A trust is a relationship between a trustee, who is required to look after the property of the trust, and the beneficiaries. The relationship is spelt out in the trust deed.
Why so popular
There are four reasons why trusts are so popular in Australia.
A trust doesn’t fall under the Corporations Act. So there is less red tape to deal with.
A trust offers asset protection. Beneficiaries don’t own the trust assets, hence harder for creditors to pierce through.
A discretionary trust offers flexibility around the distribution of income and capital.
And a trust is entitled to the Div 115 50% CGT discount, while a company isn’t.
The trustee can be an individual or a company. So the trustee is either an individual trustee or a corporate trustee.
The trustee is the legal owner of the assets of the trust. But the trustee cannot deal with these as if they were its own. The trustee holds the trust assets on trust for the beneficiaries. The beneficiaries are entitled to the assets of the trust and any income earned according to the terms of the trust deed.
For there to be a validly enforceable trust, there are three essential elements.
There must be clearly identifiable assets capable of being held on trust. It must be certain who the beneficiaries are. And the trustee must have a personal obligation to deal with the trust assets for the benefit of the beneficiaries.
There is also the general requirement that the trust assets are held by an eligible trustee. However, a temporary absence of a trustee (such as an individual trustee becoming disqualified due to bankruptcy) will not invalidate the trust.
Types of Trusts
There are different types of trusts. And there are many ways to classify them.
A trust can be a fixed trust. The class of beneficiaries to whom the income of the trust is to be paid to is fixed. And the share of the income to be received by each beneficiary is fixed.
Unit trusts are a common form of a fixed trust. The beneficial entitlement to income of the trust is divided into units and the trust income is paid to whoever holds the units at the specified distribution date.
In a discretionary trust the trustee has the discretion – hence the name – to choose which beneficiaries (from a class of beneficiaries specified in the trust deed) should receive the income of the trusts and/or what amount is to be paid to each beneficiary.
A trust formed through a will when somebody dies is a testamentary trust.
A trust prepares an annual tax return but doesn’t pay tax.
It is the beneficiaries who pay the tax for their share of the trust’s income at their marginal tax rates. In certain cases the trustee pays the tax.
Division 6 sets the groundwork for the taxation of trusts. But of course there is more.
Div 6AA is relevant when a beneficiary is a minor under 18, while Division 6E allows a trustee to stream certain types of income. And Schedule 2F restricts the use of prior year and current year losses by trusts. These are the main trust provisions.
And then there are special provisions relating to non-resident trust estates, alienation of income, public trading trusts and closely held trusts in Div 6AAA, 6A, 6C and 6D.
Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 23 March 2020