Common Business Structure – Trust

01/06/2017

Trusts

A trust is a fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of or beneficiaries. Setting up a trust is widely used for investment or businesses purposes and it can actually minimize taxable amount.

A trustee of a trust can be a person or an entity that is responsible for managing the trust’s tax affairs, including the lodgement of trust tax returns and payment for tax liabilities.

A trust’s beneficiary may also be a company or an individual. A person can both a trustee and a beneficiary, whilst the trust should have more than one beneficiary. Beneficiaries have an entitlement for trust income or capital, therefore the beneficiaries are taxed on the net income of a trust based on their share of the trust’s income. As an example, if a beneficiary has a 30% share of the trust’s income, the person is assessed on a 30% share of the trust’s net income. When a loss made by a trust in an income year, it is not distributed to beneficiaries, yet it can be carried forward the following year to reduce the trust’s net income.

There are mainly four types of trusts depending on different purposes which are unit, discretionary, testamentary and charitable trusts.

Firstly, unit trusts, which also called as fixed trusts are often used in commercial arrangements such as managed investment schemes. The interests for beneficiaries are determined by the proportion of units that those beneficiaries’ holding, so in the same way as shares issued to shareholders of a company.

Yet, in discretionary trusts (family), the trustee decides which beneficiaries receive interests and the distribution of interests for beneficiaries. For this reason, the trustee has greater control making the decision for distribution and disposition of assets. This type is widely used in family members for tax planning as well as asset protection.

Concerning about testamentary trusts (Deceased estates), the trusts are only effective after the death of the testator. Therefore, the terms of this trust are established by the testator including how the testator wishes to distribute assets.

Lastly, charitable trusts are set up for charitable purposes and eligible for concessional tax treatment or deductions to taxpayers including trusts. Private Charitable Foundation is an example of this trust which does not seek donations from the public and has to distribute money or properties to charities. Different from this, a Charitable Trusts with Gift Deductible Status is a public charity that can ask for donations from the public. Thus, there are strict requirements for this type of trust whether it has genuine charitable purposes within Australia.

References
https://www.davidgarry.com.au/overview-of-trusts-in-australia.html
https://www.ato.gov.au/General/Trusts/Specific-rules-for-some-trusts/