Business structures: Trusts ins and outs in Australia
This article is useful reading for anyone wishing to set up a company, buying or selling a company. Net Lawman hosts a further two articles on ‘business structures’. These are:
A trust is a relationship or association between two or more persons whereby one party holds property on trust for the other. The property could be land, shares, money or personal property. The first party is vested with property. The holder of the property is called the trustee. The other party (for whom the property is held) is called the beneficiary. Trusts may be made expressly in writing or implied from the circumstances. A company, for example, may trade as trustee of a trust.
Accounting and records
Trusts and companies have two different accounting and reporting requirements. The main reason for a trust to keep accounting records is for taxation purposes. Trusts allow for a great deal of flexibility in the distribution of funds and allocating of losses. The way funds are distributed and to whom should be clearly recorded for income tax purposes. Any losses should also be properly recorded for tax deduction purposes.
Contracting
Trusts enter into agreement via the trustee. However, a trustee may only enter into an agreement on behalf of a trust if the trustee has the power to do so under the trust deed.
When entering into an agreement, it is important to ensure that a trustee has the power to enter into an agreement and thereby bind the trust.
Obligations and powers of trustees
The primary obligation of a trustee is to act in the best interests of the beneficiary or beneficiaries under the trust. Sometimes the trust deed will specify other duties and obligations on trustees. Certain powers are also normally given to trustees under the trust deed. Federal legislation allows trustees to:
Invest proceeds of the trust;
Sell, mortgage or lease trust property;
Take out insurance; and
Give advances to beneficiaries out of trust property.
Whether these or any other powers are available to a trustee will depend on the type of trust and the provisions within the trust document.
Rights of beneficiaries
A beneficiary is the person who benefits from the trust. This might be a grandchild for example, if a grandparent left them money on their death. A beneficiary has the right to compel a trustee to obey the terms of the trust deed – it is in the beneficiary’s best interests.
If a trust is discretionary - that is, it allows trustees to exercise their own judgment in dealing with trust property - a beneficiary can compel a trustee to act with reasonable care.
Once a beneficiary becomes entitled to a share in the trust property, the trustee must pay them their entitlement. The trust deed may provide additional rights for beneficiaries.
Setting up and terminating a trust
A trust is set up when a person decides to put aside some property for the benefit of another person. The property may be anything, for example money, land or a business.
Trusts do not need to be in writing but usually are. The document which records the trust is called the trust deed. The trust deed will record necessary details such as those of the trustees, beneficiaries and the property under the trust.
A trust ends when its purpose is fulfilled, that is the trust property is completely used up for the benefit of the beneficiaries. Alternatively, a trust can be terminated by the person who set up the trust. Often the trust deed will set out the circumstances in which a trust terminates.
Tax issues
Tax on trusts is determined according to "present entitlement". Simply put, for any income which is received by the trust, if the beneficiary or beneficiaries are entitled to receive that income, they will be taxed on it. If they are not entitled to receive the income then the trustee is taxed.
There are further tax rules which apply to incorporated trusts.
Net Lawman advises you should be aware of the effect the Goods and Services Tax may have.
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Do not provide a complete or authoritative statement of the law;
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