A Trust is a popular business structure in Australia, widely used for business, investment, and estate planning purposes. It has its own Australian Business Number and Tax File Number (but is not a separate legal entity) and is governed by a trust deed that outlines how the trust operates.
Essentially, a trust reflects a fiduciary relationship in which one party, known as the trustee, holds assets on behalf of another party, called the beneficiaries and is legally responsible for the operation of the trust and legally liable for the debts of the trust.
TYPES OF TRUSTS IN AUSTRALIA
Trusts come in various forms, each serving distinct purposes. The main types of trusts in Australia include:
Discretionary Trusts
Also known as family trusts, these are the most common type of trust in Australia. Trustees have the discretion to decide how income and capital are distributed among beneficiaries, making them popular for tax planning and asset protection.
Unit Trusts
In a unit trust, the trust’s property is divided into units, similar to shares in a company. Unit holders have a fixed entitlement to the income and capital of the trust, making this structure popular among investors.
Fixed Trusts
Beneficiaries have a fixed entitlement to the income and capital of the trust, which the trustee cannot alter. This structure provides greater certainty, but less flexibility compared to discretionary trusts.
Testamentary Trusts
Established through a will, these trusts come into effect upon the death of the testator. They are often used for estate planning to provide ongoing financial support to beneficiaries.
Charitable Trusts
These are established to benefit the public or a particular charitable cause. Charitable trusts are subject to specific legal and tax considerations, including compliance with charity laws.
Superannuation Trusts
Australian superannuation funds typically are set up and operate as trusts under the trust law.
KEY LEGAL PRINCIPLES GOVERNING TRUSTS
The operation of trusts in Australia is governed by common law principles, legislation, and the terms of the trust deed, which outlines the specific rules and obligations of the trustee. The key legal principles include:
Fiduciary Duties of Trustees
Trustees owe a fiduciary duty to act in the best interests of the beneficiaries, manage the trust’s assets responsibly, and avoid conflicts of interest. Breach of these duties can result in legal action and removal of the trustee.
Trust Deed
The trust deed is a foundational document that sets out the terms of the trust, including how income and capital are to be managed and distributed. It also specifies the powers and responsibilities of the trustee.
Taxation of Trusts
Trusts are generally not taxed as separate legal entities. Instead, the income is taxed in the hands of the beneficiaries, who pay tax at their individual rates. Trustees may be taxed on income that is not distributed to beneficiaries.
Law
Trusts must comply with various state and federal laws that govern the administration, modification, and termination of trusts.
The Australian Taxation Office (ATO) imposes stringent rules on trusts, including requirements for tax reporting, record-keeping, and compliance with anti-avoidance measures. Trusts must ensure that distributions to beneficiaries are appropriately documented and that tax is paid at the correct rates.
ADVANTAGES OF A TRUST STRUCTURE
The main advantages of setting up a trust in Australia may include:
Asset Protection
Trusts provide significant asset protection, as the assets held within a trust are generally protected from creditors of individual beneficiaries. This makes trusts popular among business owners, professionals, and those seeking to safeguard their assets from potential legal claims.
Tax Efficiency
Trusts can offer tax advantages through income splitting. Trustees have discretion over how to distribute income to beneficiaries, which can reduce the overall tax burden by allocating income to beneficiaries in lower tax brackets, including minors (subject to specific taxation rules).
Estate Planning and Succession
Trusts are effective tools for estate planning, as they allow for the orderly transfer of assets upon death without going through probate. They enable grantors to outline detailed instructions on how assets should be managed and distributed, providing greater control over the timing and conditions of distributions.
Flexibility
Trusts offer a high degree of flexibility in managing assets and distributing income. Trustees can adjust distributions to suit the needs of beneficiaries, protect vulnerable beneficiaries, and respond to changing circumstances.
Confidentiality
Unlike wills, which become public documents upon probate, the contents of a trust deed remain private. This confidentiality is appealing to individuals who wish to keep their financial affairs discreet.
Limited Liability
For trustees, particularly when a corporate trustee is used, liability is generally limited to the assets of the trust. This protects trustees’ personal assets from being targeted in lawsuits or financial claims against the trust.
DISADVANTAGES OF A TRUST STRUCTURE
The main disadvantages of setting up a trust in Australia may include:
Complexity and Costs
Setting up and maintaining a trust can be complex and costly. Legal fees, ongoing compliance costs, and administrative requirements can make trusts more expensive than other structures like companies or sole proprietorships.
Trustee Responsibilities and Liabilities
Trustees have a fiduciary duty to act in the best interest of beneficiaries. Failure to comply with these duties can result in legal consequences. While corporate trustees limit liability, individual trustees can be held personally liable for breaches of trust or mismanagement.
Restrictions on Losses
Trusts are generally unable to distribute losses to beneficiaries, which means that losses cannot be used to offset the income of beneficiaries. This restriction can be a drawback in business contexts where the trust structure may not fully utilise tax losses.
Taxation Complexity
The tax treatment of trusts can be complex, particularly regarding capital gains and income distribution. Trusts are subject to specific rules, such as the ‘present entitlement’ requirement for beneficiaries and the application of higher tax rates on income distributed to minors.
Lack of Control for Beneficiaries
Beneficiaries of a trust typically have limited control over the trust’s assets. The trustee makes all decisions about how the assets are managed and distributed, which may not always align with the beneficiaries’ desires or expectations.
Limited Borrowing Power
Trusts may face challenges when it comes to borrowing money. Lenders often require personal guarantees from trustees, especially where assets within the trust are insufficient to secure a loan. This can limit the trust’s ability to leverage assets for further growth.
If you need to establish a trust structure for your business or family, please reach out to The IP House Lawyers. We have extensive experience in providing advice on and creating trust deeds tailored to your specific requirements, ensuring compliance with all relevant laws.
For any further information or queries on the above content, please contact us.
The Author
Jean Kallmyr | Lawyer, The IP House Lawyers | t: 0435 799 831 | e: admin@theiphouse.com.au
Key Contact
Claire Darby | Managing Director/Lawyer, The IP House Lawyers | t: 0412 998 951 | e: claire@theiphouse.com.au
Disclaimer
The information and contents of this publication do not constitute any legal or financial advice. This publication is intended only for reference purposes for The IP House Lawyers’ clients and prospective clients.
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