The information below provides a general overview of how a family trust operates and explains some of the commercial advantages and disadvantages of conducting business or investing with a family trust structure.
There are many tax planning, asset protection and distribution of wealth issues to be considered before a decision is made to establish a family trust. For those who intend using this tax structure, this information should be used as starting point only. Talk to us for a more detailed discussion about the suitability of a trust structure for your circumstances.
Many accounting and legal matters, such as, stamp duty and land tax, have not been addressed here. We are not in a position to advise you, trustees and beneficiaries should read the trust deed to fully understand their rights, powers, obligations and duties. This guide is not intended to replace any legal or tax advice; readers should consult a qualified practitioner for advice.
All Sorted Business Services is a registered Australian Securities and Investment Commission (ASIC) Agent and is able to create companies and trusts on behalf of our clients and act on your behalf in relation to ASIC requirements.
A discretionary family trust is established for a family with a payment of an amount, called "settled sum", by the settlor to the trustee. It is to be held in trust in accordance with the deed, for the benefit of the beneficiaries. Many business owners prefer to run their businesses under a trust structure due to the many advantages that it offers over other structures
A family trust is where the beneficiaries are all predominantly family or related members of the same family and the trustee has full discretion which beneficiary gets which distribution portion of income or capital of the trust.
The trustee owns the property of the trust and distributes each year; income of the trust, to various family members with a common purpose. This common purpose includes minimizing the total income tax to be paid on trust's net income.
A family trust runs for 80 years or earlier, this termination date is called “vesting day”, when beneficiaries are entitled to the whole of the trust fund. Until that day, the trust assets are held by the trustee.
A Discretionary trust which makes a family trust election is known as Discretionary Family Trust. We sell online Discretionary trust deed where the trustee can make a family trust election with the ATO.
A family trust structure has many advantages over other tax structures like, partnership, company etc, however it has some limitations. Below is a list of advantages, please note that this list is not exhaustive.
In addition to the information below, the Australian Tax Office provides some useful information on family trusts and how they work within the tax system.
However, family courts in certain situations are known to have 'seen through' the trust arrangements and allocated assets held in a family trust amongst spouses. Likewise, few recent cases have raised the possibility of a trustee in bankruptcy accessing the assets in a discretionary family trust over which the bankrupt beneficiary has 'de facto' control, we recommend that you take your own legal advice.
The main disadvantage of operating with a family trust structure is that it cannot distribute capital or revenue losses to beneficiaries. Hence, when a family trust incurs a loss beneficiaries are not able to offset that loss against any other assessable income that they may derive from other sources such as salary, interest, dividend etc. However, losses can be held within the family trust structure to be used to offset against future profits.
Family trusts are created by a legal document called a “trust deed” prepared by a solicitor which outlines the purpose of the trust, the rights and obligations of the trustees and beneficiaries, powers of the trustee, and identifies various parties such as initial Beneficiaries, Trustee(s) & Appointor.
A family trust is created by “declaration of trust” on property of the trust or by payment of settlement of money by a person called the “settlor” to the person called the “trustee”, to deal with trust funds as provided in the deed of settlement.
Care should be taken that Settlor of a Family Trust is an independent person. Settlor cannot be a trustee and can not be a beneficiary of the trust and nor his spouse or children be beneficiaries.
A trustee of a family trust or a beneficiary cannot act as settlor. The settlor is usually a friend or accountant who helps the client to establish the Discretionary trust. The settlor has no right to income or capital of the trust assets. Once the settled sum has been paid by the settlor and trust deed executed, it has no further role.
When property is transferred to the family trust from a family member, as settlement money, there could be stamp duty & capital gain tax issues, care should be taken to decide this amount. Usually this amount is below duty amount and is only $10.
The appointor can remove / replace trustee. The appointor "in de facto" controls the trust. If the trustee does not follow the appointor's directions, the appointor can simply remove the trustee and appoint another.
It is not necessary to name an appointor. However, to handle the situations such as the death or insolvency of a trustee, it is advisable to name an appointor. A beneficiary or even the settlor could be named as an appointor. The "initial appointor" is usually mentioned in a schedule to the trust deed. The deed allows appointor to resign and nominate another person(s) as appointor. If the appointor dies without nominating someone else the deceased appointor’s legal representative can become an appointor.
The Trustee is appointed by Settlor with powers contained in the trust deed. Trustee owes a duty of care of "good faith" to the beneficiaries and the deed requires that all trustee(s), at all times, act in best interests of all beneficiaries.
Trustee(s) may be held personally liable for debts incurred in their capacity as a trustee but have the right to be indemnified out of the assets of the family trust. A trustee can resign if he / she so wishes by giving notice to appointor or to all beneficiaries.
A Trustee is responsible to look after trust funds by investing & managing it and distributing to various beneficiaries at the end of the financial year. They must also maintain books of account and lodge relevant income tax returns with the tax office.
A Trustee can either be one or few individual(s) or a company. Individual trustee(s) should not be below 18 years of age and should not be a disqualified person(s). If trustee is a company, its affairs are controlled by its directors and eventually by its shareholders by virtue of their power to appoint or remove directors.
Usually family members of a discretionary family trust create a (new) company to act as a trustee. They then nominate various family members as beneficiaries. Where there are not enough family members to reduce total tax to be paid by the family on trust income, advisors may recommend creating another company and appoint it as a beneficiary (see below). This allows tax to be paid on family trust income at company tax rates instead of higher Individual marginal tax rate.
Individual trustee(s) can also be beneficiaries. However, most advisors prefer a company to act as trustee of the family trust and family members (who can also be directors of the trustee company) to be beneficiaries of the trust.
There is no rule that Individual trustees cannot also be beneficiaries. However, since trustee(s) are to be seen to act in the benefit of ALL beneficiaries, having one or few Individual beneficiaries as trustee(s) may break that fiduciary duty of trustee(s). Hence many advisors prefer a company to act as trustee.
If you are the only individual trustee and are also the sole beneficiary of the trust, the trust may be invalid as a person cannot hold an asset on trust for his or her own benefit. In this situation, a new company can be established to act as a trustee with you as a sole director. Then you can be the sole beneficiary of the family trust.
A beneficiary is a person for whose benefit the trustee holds trust property. In most family trust deeds "initial beneficiaries" are noted in a schedule. There are classes of beneficiary who can be parents, grandparents, brothers, sisters, children, grandchildren, aunties, uncles, nephews, and nieces of initial beneficiaries. You can also have a related company or a charity as a class of beneficiary. You must be careful in nominating another trust as beneficiary of the original trust. This is because predominately income of the family trust must remain in the family. Other trusts may have other beneficiaries who are not family members of the original trust.
The root benefit of a discretionary family trust is to distribute income to beneficiaries who are likely to pay the least amount of income tax.
Due to this trustee’s discretion, the beneficial ownership of assets of the trust does not pass to any beneficiary till "vesting date".
Trustee has legal ownership but not beneficial ownership of trust assets. Hence, even if a beneficiary becomes insolvent, his creditors cannot claw back assets of the trust.
Besides fiduciary duty advantage as listed above, following are other benefits of having a company as a trustee:
Trustee must act in "Good faith" whilst handling trust affairs. This means that trustee must put interest of the trust ahead of their personal interests. They must also act in a manner a person would in dealing his or her own personal assets.
The trustee is the legal owner of trust’s property. This means that trustee’s name should appear on all ownership documents, such as shares, managed funds, property etc. However, this ownership of asset is not in their own benefit right, but as a legal owner, on behalf of the trust.
Hence, wherever applicable, assets ownership documents should carry the tag "In Trust For", or ITF or "As Trustee For" ATF. For example, the owner of the trust can be either "Mr R Smith ITF Smith Family Trust" , in case of individual trustee or "R Smith Pty Ltd ATF Smith Family Trust" in case of company trustee.
In some instances, the above name cannot be inserted in the ownership documents, as most land title offices do not recognise a trust and will only register title of property in the name of the trustee only. It is the trustee who will be the legal owner of the property. Land titles will not allow the above tag.
In these circumstances, property has to be registered in the name of Individual Trustee or company trustee. Some advisors recommend drawing up a separate "declaration of trust" deed for each such asset.
After 80 years of creation date, or earlier, if the trustee decides, the trust will "vest" or cease. The trustee will on "vesting date", put together all the trust’s property, its capital and distribute to all beneficiaries.
If a family trust is created over an identifiable dutiable property, generally full duty is payable. It is calculated on the value of the dutiable property identified in the trust deed. Where the trust contains different types of dutiable property for which different stamp duty applies the trust will be charged the stamp duty as if a separate instrument had been created for each type of property. However, if a family trust is established over a non dutiable property a concessional rate of stamp duty or nil duty is applicable.
If the family trust has a Corporate Trustee (A Company) that includes the business name, you may not need to register your business name separately. For example, if the business is to be called XYZ Trading and your company name is XYZ Trading Pty Ltd, you may be able to trade using the company name.