What is a trust?
A trust is not a separate legal entity in the same way that a company is. A trust is a business structure where a trustee accepts the legal responsibility for carrying on a business for the benefit of other people (the beneficiaries).
The trustee can be an individual or a company, although usually the trustee is a company as this is more tax effective. The trustee is responsible for the financial well-being of the trust, and will make decisions about all matters relating to the business including investments, distributing income and borrowing money.
Types of trusts
The two main types of trusts are discretionary trusts and unit trusts. In a discretionary trust the trustee decides how profit will be distributed among beneficiaries. The beneficiaries themselves do not have a separate interest in the trust assets under a discretionary trust. They merely have the right to be considered when the trustee makes a distribution. In a unit trust, each of the beneficiaries has units in the trust representing a right to a share or portion of the income or capital of the trust.
Sometimes businesses are conducted by family trusts. These are usually discretionary trusts controlled by the senior member or members of the family or a corporate trustee whose directors are senior family members. They are usually designed to protect assets or to enable tax effective income distributions among family members.
Duties of a trustee
- to carry out the terms of the trust deed
- to act in good faith
- to act in the best interests of the beneficiaries
- to keep accounts
- to preserve trust property
- to insure trust property
- to properly invest trust funds
- to provide information to beneficiaries when required; and
- in the case of a discretionary trust, to exercise discretion properly. This normally allows the trustee significant leeway in how income and capital is distributed.
- The trust deed will set out such matters as the powers and duties of the trustee, the names of various parties, how the trustee can be removed, who the beneficiaries are, how income and capital should be dealt with and what the rights and powers of the beneficiaries are.
- A trust provides asset protection by separating the control of an asset from the owner of the asset, which is useful for protecting the assets of young persons or families.
- Having a corporate trustee allows more than one individual (for example, the directors of the company) to make decisions about how income/capital is to be divided among the beneficiaries.
- Trusts are very flexible for tax purposes. A discretionary trust provides flexibility in the distribution of income and capital gains among beneficiaries.
- Unlike sole proprietors or partnerships, beneficiaries of a trust are usually not liable for the debts of the trust.A trustee is usually personally liable for the debts incurred while acting as trustee of the trust. If the trustee has acted in a legitimate manner then the trustee is entitled to be indemnified out of the assets of the trust for any debt incurred.
- A trust limits liability in relation to the business.
- The beneficiaries pay tax on income they receive from the trust at their own marginal rates.
- Trusts receive a discount on the amount of capital gains tax payable on capital assets held for more than twelve months.
- Setting up a trust is much more expensive than setting up sole proprietorships or partnerships, not least because a trust deed will need to be prepared by a solicitor.
- The business must be operated in accordance with the conditions set out in the trust deed.
- The trustee is obliged to hold and manage the property for the exclusive benefit of the beneficiaries.
- Like companies, there are numerous regulations with which trusts must comply. For example, a trust must have its own Tax File Number to use when lodging its annual tax return. If you are the trustee you must apply for a tax file number for the trust. If the trust is carrying on an enterprise in Australia, as the trustee you must register for an Australian Business Number for the trust. If the trust is carrying on an enterprise, you can register for Goods and Services Tax (GST) as trustee of the trust. A trust must be registered for GST if its annual GST turnover is $75,000 or more. If yours is a non-profit organisation the registration threshold is $150,000.
- Losses incurred in a trust are not distributable and the beneficiaries cannot offset the losses against any other income they may have.
- Unlike a company, penalty rates of tax will apply if a trust retains profits for expansion.
What should I do next?
Trusts are a complicated legal area which will require the input of an experienced solicitor or accountant. If you are thinking about starting a new business and are unsure of which structure to choose, or if you are planning on changing your current business structure, our lawyers at You Legal will be happy to advise you.
* This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.