A trust is a legal relationship where one person (the ‘trustee’) holds assets for the benefit of one or more other parties (the ‘beneficiaries’). A discretionary trust (also known as a family trust) is a trust in which the trustee is given the power (or discretion) to decide which of the beneficiaries are to benefit from the trust.

In this article, we set out the eight steps involved in setting up a discretionary trust.

Advantages of a Discretionary Trust

A discretionary trust is an important vehicle for a number of reasons. The key advantages are summarised in the table below.

 

Advantage Explanation
Asset Protection The assets of a discretionary trust are separate to the assets of the beneficiaries. As a result, the trust assets may be protected from creditors in circumstances where a beneficiary is sued or made bankrupt.
Tax Planning The overall tax paid by a family group may be reduced by:

  • distributing income and capital to beneficiaries on lower marginal tax rates; and
  • distributing different types of income to different beneficiaries (i.e. “streaming”).

Each beneficiary then pays tax at their marginal rate on income distributions received from the trust in each financial year.

Carry Forward Losses A discretionary trust may carry forward losses, in certain circumstances.
Capital Gains Tax Discount A discretionary trust is entitled to a 50% discount on any capital gains made on disposal of any assets held by the discretionary trust for greater than 12 months.

 

You may need to seek legal, accounting and tax advice to determine whether a discretionary trust is appropriate based on your circumstances. Set out below are the steps required to set up a discretionary trust.

1.       Select Trustee

The trustee is the person or legal entity responsible for administering the discretionary trust in accordance with the terms of the trust deed.

The trustee may be one or more individuals or a private (i.e. proprietary limited) company specifically set up to act as trustee. Despite the initial cost of setting up a company, it is generally recommended that a company act as trustee of a discretionary trust in order to minimise the risk of personal liability (which is greater for individual trustees than for directors of a corporate trustee). Using a company also avoids unnecessary administration where changes must be made in respect of the registered owner of each trust asset where there are changes in individual trustees.

2.       Draft Discretionary Trust Deed

Contact a lawyer to help you draft a professional deed of trust. LegalVision can assist you – simply fill out the form on this page.

3.       Settle Trust

The trust deed must be signed by the settlor, who must give the initial settlement sum (usually $10) to the trustee.  The settlement sum can be paid by cash or cheque.

The settlor is usually someone unrelated to the beneficiaries of the trust, such as an accountant or close family friend. For tax reasons, the settlor should not be a beneficiary of the discretionary trust.  The settlor usually has no further involvement with the trust after the initial settlement.

4.       Trustee(s) Sign Trust Deed

The trustee(s) must hold a meeting accepting its/their appointment as trustee(s) of the trust and agree to be bound by the terms of the trust deed.

5.       Stamping

Stamp duty may be payable on the trust deed. Stamp duty is a state-based tax and therefore applies differently in different states or territories of Australia. You should determine whether you need to pay duty by contacting the relevant revenue authority or seeking assistance from a local lawyer or accountant. Even if you do not need to pay duty, the trust deed may need to be lodged with the relevant revenue authority so they can mark that no duty is payable.

Stamping can be arranged either directly through the relevant revenue authority in your state or territory or by a lawyer, accountant or other service provider that offers stamping facilities.

In New South Wales, you must pay stamp duty of $500 for each new trust within three months of the trust being established. This is in accordance with the provisions of the Duties Act 1997 (NSW), which is administered by the NSW Office of State Revenue.  If you do not pay the duty within three months then interest is payable until you do pay the duty.

6.       Apply for ABN and TFN

Once the trust has been established, an application for an Australian Business Number (ABN) and tax file number (TFN) should be made for the trust. An application for both an ABN and TFN can be made online through the Australian Business Register or with the assistance of an accountant or lawyer. It can take up to 28 days to receive these numbers.

7.       Open Bank Account

A bank account should be opened for the trust in the name of the trustee as trustee for the trust. This should occur after the discretionary trust has been established and the trust deed stamped (if stamping is necessary). The bank may require the trust ABN before it will open the account.

Once a bank account has been opened, the first deposit in the account should be the settlement sum. The settlement sum should be deposited before any other deposits are made or any other transactions are entered into by the trust.

8.       Discretionary Trust is Operational

The discretionary trust is now operational and is able to accept contributions (i.e. further settlement sums). Subject to the terms of the trust deed, the trust can also borrow money and make investments.

Key Takeaways

Setting up a discretionary trust is a complex process, from drafting the trust deed to meeting your taxation obligations. However, when set up, a discretionary trust can protect your assets.

For these reasons, you should have both legal and tax advice to guide you through the steps. To get started, call LegalVision’s taxation lawyers on 1300 544 755 or fill out the form on this page.

Lachlan McKnight
If you would like further information on any of the topics mentioned in this article, please get in touch using the form on this page.
If you would like to receive a free fixed-fee quote for a legal matter, please get in touch using the form on this page.