A trust is not a separate legal entity, but refers broadly to an obligation accepted by a person or persons (the “trustee” or “trustees”) in relation to property (the “trust property”), for the benefit of another person or persons (“beneficiaries”).
Trustees are required to undertake all obligations and transactions on behalf of the trust. As this role carries legal liability for the activities undertaken, trustees are often companies so as to limit liability.A trust deed sets out a trustee‘s obligations and the relationship between trustee, beneficiaries and the trust property.
The most common types of trust are:
- Bare trust
- Fixed trust
- Discretionary trust
- Unit trust
Bare trust - This is the simplest form. It is a nominee arrangement whereby one person (usually a company) is the legal owner of an asset but another enjoys the entire beneficial interest in the asset. A common example is where a trustee company has legal ownership of shares, but another person beneficially owns the shares.
Fixed trust - In a fixed trust, each beneficiary enjoys a fixed or predetermined share of the income and/or capital of the trust.
Discretionary trust - In a discretionary trust, some or all of the entitlements of the beneficiaries in any income year are governed by the exercise of the trustee‘s discretionary powers. The trust instrument may specify limits on the extent of the trustee‘s discretion. The discretion may include the right to add or remove beneficiaries.
Unit trust - A unit trust is a form of fixed trust whereby each beneficiary is entitled to trust income and trust property, according to the number of units owned. The trust instrument may permit units to be transferred in the same way as shares in a company. Many investment funds use this structure.
Taxation of trusts - Although in general law a trust is not recognised as a separate legal entity, they are recognised as such for taxation purposes.
A trust must obtain its own tax file number (TFN), used when lodging annual income tax returns. The trustee needs to register for the TFN in its capacity as trustee.
Except in limited circumstances, beneficiaries who are “presently entitled” to income of a trust are taxed on the net income of a trust estate for an income year, whether the income is distributed or not. Beneficiaries must include their share of the trust‘s net income in their personal tax return for the year the entitlement arises.
If the beneficiaries are not entitled to all the income of the trust estate, the trustee will be liable to pay tax on part or all of the net income of the trust estate. Typically, this occurs where the income is distributed to minor or non-resident beneficiaries, or if a trust fails to distribute all of its income for the year.
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All representations and information on this site is general in nature and should not be relied upon as advice. If you require specific advice please contact us.