A trust is a legal relationship whereby one party, known as the trustee, holds assets for the benefit of one or more other parties, known as the beneficiaries. The most common form of trust is a discretionary trust, also known as a family trust. Here, the trustee is given the power/discretion to decide which of the beneficiaries are to benefit from the operation of the trust.
Other types of trust structures include a unit trust and a hybrid trust. For a unit trust, the property held in trust is divided into fixed and quantifiable parts, called units. Beneficiaries subscribe to these units similar to shareholders subscribing to shares in a company. A hybrid trust is a mix between a discretionary trust and a unit trust. Below, we set out nine FAQs that you should consider before setting up a trust.
1. What Are Some Benefits of a Trust?
For a discretionary trust, benefits can include:
- Asset protection;
- Tax minimisation;
- Carrying forward of losses;
- Capital gains tax discounts; and
For a unit trust, benefits can include:
- Fewer regulations than a company;
- Easy to introduce new equity partners;
- Tax minimisation and capital gains tax discounts; and
- Relatively simple to wind up.
2. How Can a Trustee Distribute Capital and Income to Beneficiaries Through a Trust?
The distribution of capital and income to beneficiaries of a trust is set out in the relevant trust deed for the structure. For discretionary trusts, the trust deed generally provides that the trustee has the power at its absolute discretion to distribute capital and income to beneficiaries (thus allowing you to structure tax efficiently). However, if the trust involves (or may in the future involve) non-family members, such as business partners or external investors, a unit trust should be used, where terms of the trust deed fixes the distribution of capital and income.
3. Should I Have an Individual Trustee or Corporate Trustee?
We typically recommend a trust has a corporate trustee.Despite slightly higher start-up costs, it is advantageous for the trustee to be a corporate trustee rather than an individual for liability reasons.
The main advantages of having a corporate trustee are:
- Limited liability;
- Separation of personal assets from trust assets; and
- Ease of succession.
The main disadvantage is cost and complexity as you would need to set up another company and have another set of records for that company.
4. What is the Setup, Maintenance/Annual Costs for a Trust with a Corporate Trustee?
Besides the initial setup costs for the company incorporation and the discretionary trust (and any holding company/operating company that may be applicable), additional setup fees can include:
- Your ABN and TFN registration for each entity (if required);
- Registering for GST and PAYG (if required);
- Registering a business name (if required); and
- ASIC annual review fees for corporate entities (currently $246).
You can find additional ASIC fees and charges on the ASIC website. You will also generally have accountancy fees in relation to the management of your structure.
5. What are the Record Keeping Requirements for a Company (Including a Corporate Trustee)?
The Corporations Act 2001 (Cth) (Corporations Act) requires that a company must keep written financial records that:
- Correctly record and explain its transactions and financial position and performance; and
- Would enable true and fair financial statements to be prepared and audited.
Basic financial records that a company is expected to keep include:
- Financial statements;
- General ledger;
- General journal;
- Asset register;
- Computer back up disks;
- Cash records;
- Bank account statements, bank reconciliations, and bank loan documents;
- Sales/debtor records;
- Work in progress records;
- Invoices and statements received and paid;
- Creditors ledger;
- Unpaid invoices;
- Minutes of meetings of directors and/or members deeds; and
- Fuel tax credits (if applicable).
If you have contractors/employees, you must also keep:
- Tax file number (TFN) declaration forms or withholding declaration forms;
- Records of wages, allowances and other payments you make to them;
- Superannuation records, including payments you make and records that show you have met your superannuation obligations;
- Records of fringe benefits you provided;
- PAYG payment summaries and withholding records relating to business payments; and
- Copies of any contracts you have with contractors.
A company must also maintain records as detailed in its constitution and shareholders agreement (if applicable).
6. What are the Record Keeping Requirements for a Trust?
In relation to a trust, the trust deed will set out its record keeping requirements. This may include but is not limited to:
- Accounting and other records of the trust, including receipts and expenditures concerning the trust fund;
- Minute book of the accounting and other records of the trust containing minutes of all resolutions of the trustee under the trust deed; and
- Accounts consisting of a balance sheet and profit and loss statements.
7. How do I Add More Beneficiaries to a Trust?
Generally a trust deed includes a very broad definition of beneficiary so that it should not be necessary to amend it in the future. However, if you wish to include additional beneficiaries to the trust after it has been set up, the trust deed will need to be amended by the terms of the trust deed. This is generally done in writing by way of either a deed or resolution which will be required to be executed by the trustee and appointer.
8. How are Trust Funds Distributed?
The trust deed will govern the distribution of the trust funds. This is usually at the absolute discretion of the trustee, in the case of a discretionary trust, or a fixed distribution, in the case of a unit trust. The company’s constitution and/or shareholders agreement will govern the distribution of the company dividends. Generally, the directors of the company will determine by a special resolution of the directors that a dividend is payable and will fix the amount, time for payment and method of payment of the dividend. All dividends declared by the company are generally franked to the maximum extent permitted based on the company’s available franking credits.
9. How do you Wind up a Trust?
The trust deed will govern the process in relation to winding up the trust. The vesting date of the trust is generally on the 79th anniversary of the date of the trust deed. If the trust is required to be wound up before the vesting date, the trust deed will generally provide that subject to any provision that limits or restricts distributions of income or capital, the trustee must pay or otherwise discharge all liabilities of the trust and distribute the trust fund before the new vesting date.
Trusts are complex, and it is important that you obtain accurate legal and financial advice before setting one up. LegalVision can assist in advising and setting up your trust structure. Questions? Get in touch with our business lawyers on 1300 544 755.