Trusts

A trust is created where one party [Trustee] holds property for the benefit of another party(or parties) [Beneficiary]

The Trustee/s may be one or more natural persons or a Company.

The property is held in the name of the Trustee as legal owner and the Trustee applies the income and corpus (Capital) for the benefit of the Beneficiary.

The application of income is controlled by the Deed setting up the Trust.

  • Discretionary Trust — At complete discretion of the Trustee
  • Fixed Trust — In specified proportions as set by the Deed
  • Unit Trust — In proportion to the number of units issued.

An inter vivos trust is a trust created by a living person and a testamentary trust is one that has been created by will.

Benefits

  • Income streaming
  • Flexibility of Types & distributions (Tax Effective)
  • CGT concessions
  • Asset protection
  • Addition/Removal of benefciaries

Disadvantages

  • Unit Trusts (Sec. 160ZM)
  • No land tax threshold with discretionary trusts
  • Personal exertion income
  • Carry Forward status of Losses requires careful monitoring to ensure they are available.
  • Prior year budget proposals contained some restrictive provisions relating to the transferability of Trust tax losses. No comment is offered on these provisions, as they are not yet law.

Income Streaming

This is unique to trusts and is the ability to receive a number of types of income and to pass that income type to an individual specific beneficiary. This can be invaluable as the different types of income may have varying tax implications.

In the following example the Interest income may be given to a non-resident, which restricts the tax to 10%. If the Capital gain is given to a taxpayer with carry forward capital losses, the tax payable would be reduced.

Flexibility of Types & distributions (Tax Effective)

Different types of Trusts may be combined to give excellent effect. Consider that a discretionary trust may have been a beneficiary which is a Unit Trust thus the formality of rigid distributions may be observed but the flexibility retained in the Discretionary Trust. This can be made to work in reverse if that particular effect is desired.

It should be noted that distributions may be made by transferring assets without having to realize them.

CGT Concessions

If the trust sells assets after holding them for in excess of 12 months it will benefit from the concessional discount available under Capital Gains Tax and pass this discount on to the beneficiaries. This benefit is not available to companies.

Asset protection

Assets in the name of the trust are NOT YOUR ASSETS and cannot be attacked by business creditors. Care is essential however if you have loaned monies to the trust, as assets may need to be realized by the trust to pay you back the loan. Individual advice is needed in this area.

Addition/Removal of beneficiaries

The Trust Deed may allow alteration to the beneficiaries. This may give rise to serious CGT issues. It is for this reason that the correct structure should be carefully planned before commencing any operations.

DISADVANTAGES

Personal exertion income

Income earned from the personal services of one taxpayer that are redirected through a trust & then distributed to other taxpayers may be reclassified "income from personal services". The Tax Office may divert these back to the taxpayer who performed such services.

Salaries or fees performed by associated persons must have a documented and explainable basis for the payments.

Carry Forward status of Losses are unclear at this stage.