What is a Trust?
Trusts are widely used for investment and business purposes.
A trust is an obligation imposed on a person or other entity to hold property for the benefit of beneficiaries. While in legal terms a trust is a relationship not a legal entity, trusts are treated as taxpayer entities for the purposes of tax administration.
What is Trustees?
The trustee(s) (there may be more than one) of a trust may be a person or a company (the latter is known as a corporate trustee). In either case, the trustee must be legally capable of holding trust property in their own right. The trustee holds the trust property for the benefit of the beneficiaries.
Where the trust is established by deed (which in the case of a deceased estate is the will), the trustee must deal with the trust property in line with the intentions of the settlor as set out in the trust deed. They must also act in accordance with the relevant state or territory law regulating trusts, and with any other applicable law, including tax law.
Under trust law, trustees are:
- personally liable for the debts of the trusts they administer, and
- entitled to be indemnified out of the trust property for liabilities incurred in the proper exercise of the trustee’s powers (except where a breach of trust has occurred).
Under tax law, the trustee is responsible for managing the trust’s tax affairs, including registering the trust in the tax system, lodging trust tax returns and paying some tax liabilities.
What is Beneficiaries?
A trust beneficiary can be a person, a company or the trustee of another trust.
The trustee may also be a beneficiary, but not the sole beneficiary unless there is more than one trustee.
Beneficiaries may have an entitlement to trust income or capital that is set out in the trust deed or they may acquire an entitlement because the trustee exercises a discretion to pay them income or capital.
Generally, the beneficiaries are taxed on the net income of a trust based on their share of the trust’s income – regardless of when or whether the income is actually paid to them.
What is advantages and disadvantages?
- Reduced liability especially if corporate trustee.
- Assets are protected.
- Flexibility of asset and income distribution.
- Can be expensive and complex to establish and administer.
- Difficult to dissolve, dismantle, or make changes once established particularly where children are involved.
- Any profits retained to reinvest into the business will incur penalty tax rates.
- Can’t distribute losses, only profits.
What is a Family Trust?
A trust becomes a family trust when the trustee of the trust makes a ‘family trust election’. To make the election, the trust must be controlled by a ‘family group’.
Trusts that qualify as a family trust for the purposes of the trust loss provisions may benefit from concessional tax treatment.
However, family trust distribution tax (FTDT) applies to distributions made from these trusts if the trustee confers a present entitlement, or distributes income or capital, makes concessional loans or otherwise provides or allows the use of income or capital of the trust for less than its market value to a person or entity that is outside the trust’s family group.
FTDT is payable by the trustee of the family trust at the highest marginal rate plus the Medicare levy. Beneficiaries that receive distributions on which FTDT was paid receive the distribution as non-assessable non-exempt income (against which they can’t deduct expenses).
What is a Unit Trust?
Unit trusts are used in many commercial arrangements, including managed investment schemes. Units can often be bought and sold in a way similar to shares in a company. Some unit trusts are taxed like companies and their unit holders like shareholders.