Stamp duty requirements for Trust Deeds

Trusts are widely used for investment and business purposes.

A trust is an obligation imposed on a person or other entity to hold property for the benefit of beneficiaries. While in legal terms a trust is a relationship not a legal entity, trusts are treated as taxpayer entities for the purposes of tax administration.

The trustee is responsible for managing the trust's tax affairs, including registering the trust in the tax system, lodging trust tax returns and paying some tax liabilities.

Beneficiaries (except some minors and non-residents) include their share of the trust's net income as income in their own tax returns. There are special rules for some types of trust including family trusts, deceased estates, and super funds.

What are the main types of Trusts?

• Fixed Trust
• Discretionary Trusts 
• Hybrid Trusts
• Charitable Trusts 
• Superannuation Trusts 
• Testamentary Trusts 
• Bare Trust
• Unit Trusts

Today we will be focusing on Discretionary Trusts and Fixed Unit Trusts.

What is a family trust?

A family trust is a common type of trust used to hold assets or run a family business.

It is a relationship where one or more trustees hold property or assets for the benefit of one or more beneficiary.

Trusts can benefit anyone who wants to manage their money in a way that is more tax effective and beneficial to their family.

Setting up a family trust is often driven by a new business opportunity, a growing business, or a need to better structure your investments. When set up correctly, there are clear tax benefits when it comes to operating as a family trust.

Company123 can help set up your trust quickly, easily, and professionally. In our role as tax agents and with our team of legal experts, we can provide a clear, comprehensive deed and all related documents for the fee of $129 (Plus GST). We provide both Family (Discretionary) Trusts and Unit (Fixed) Trusts at high standards.

How do family trusts work?

Family trusts work in an equivalent way to a parent opening a bank account for a child. While that account and the money within belong to the child, the parent is the person responsible for and in control of the account.

Key Parties to a Family Trust

The Trustee

The trustee owns and controls the business’ assets, distributes income, and must comply with the obligations of the trust deed and act with the best interests of the beneficiaries in mind.
The trustee is also responsible for registering the trust for tax purposes, lodging tax returns and meeting any other tax obligations on behalf of the trust.

Corporate vs Individual Trustee

Because of this, often, this business structure is more tax effective.

Advantages of switching/implementing a corporate trustee structure include:

• They can exist indefinitely, unlike an individual trustee who will eventually die.
• You do not have to change the legal ownership of the trust’s assets when the directors or shareholders of the corporate trustee change. In contrast, you have to change the legal ownership of the trust’s assets when an individual trustee changes.
• the shareholders of the corporate trustee can effectively control the trust by appointing the directors of the corporate trustee.
• Asset protection; and
• Limited liability.

Therefore, corporate trustee can be very beneficial and allow the trust further longevity.

Beneficiaries

The beneficiaries are the people entitled to the income and assets of the trust.

The beneficiaries of the trust are usually members of a family, as well as companies and trusts that are controlled by that family.

For example, the primary or default beneficiaries may be a parent or parents and the secondary beneficiaries can be children, grandparents and/or companies.

The role of the default beneficiary is to receive and/or decide the direction of any funds that are not allocated by the trustee. It is also important to note that you cannot change the default beneficiary without triggering capital gains tax and stamp duty.

Beneficiaries will include their share of the trust’s net income as income in their own tax returns and if they receive income from other sources they will be taxed for these as well.

Settlor

The settlor must hand over the settled sum to the trustee to be held on the terms of the trust for the benefit of the beneficiaries.

The settlor does not have to reside in Australia; however, they must be present when the trust deed is settled because he/she is responsible for the trust property becoming vested in the trustee.

• The trustee must issue a receipt to record the settling sum exchange has occurred. This is the point at which the trust is created because, by executing the trust deed and providing the settled sum:
• The settlor has put the trustee in charge of trust property.
• The settlor has defined for the trustee which persons fall within the class of beneficiaries, as stated in the trust deed; and
• The trustee has agreed to act.
  

The settlor then steps out of the picture.

Why is a settlor's role limited?

There are tax implications under the Income Tax Assessment Act 1936[1] where a settlor creates a trust and:

• Has the power to revoke or alter the trust to acquire a beneficial interest in the income derived by the trustee, or take back trust property; or
• The income of the trust is payable to the minor children of the settlor.
  

In such a case, the trustee of the trust will be assessed as having to pay income tax on the income of the trust by the ATO, rather than income tax being assessed in the hands of the beneficiaries of the trust to whom distributions are made.

For this reason, it is advisable to limit the settlor's role in a trust to the initial establishment of the trust and payment of the settled sum. To avoid the perception that the settlor's declaration of trust is revocable, the settlor should be unrelated to the trustee and the beneficiaries of the trust.

Appointor

Often, the appointor of a family trust is the person who wants to set up the trust. The appointer is also responsible for appointing and replacing the trustee or trustees of the trust. As such, they have the ultimate control of the trust’s assets. However, the appointer is not involved in the day-to-day control and running of the trust. Rather, the trustee fills this role.

Discretionary Trust: Pros

With a discretionary trust, a trustee or trustees hold the property for the beneficiaries, and an appointor has the ability to hire and fire the trustee. Therefore, the appointor has ultimate control over the wealth in the trust.

Many Australian businesses are carried on in discretionary trusts. This is especially true of family businesses:

Asset Protection

Many business owners face a degree of risk in owning a business, for example if the business fails, they may be sued personally or put at risk of bankruptcy. Similarly, those in partnerships, particularly those with bank debts, can face similar risks.

Assets that are within a family trust are protected from creditors, so even if a claim is made against you, the assets are not in your name and therefore cannot be accessed in these circumstances.

Tax Advantages

Operating your business from a family trust and having the company act as trustee means you can retain the limited liability benefits of a company structure while taking advantage of the tax flexibility benefits of a family trust.

Keeping it in a controlled environment

Whether you are looking to keep your family home in the family or want to stagger inheritance distribution to ensure it’s not all spent at once, a family trust prevents Will contests and secures assets.

Assets held within the trust do not form part of a deceased estate preventing contests to a Will or your child’s spouse claiming their share of an inheritance.

A family trust can provide long term financial support for your children or grandchildren, allowing you to invest in their long-term education and distribute family assets to future generations.

It can protect vulnerable beneficiaries who may make poor spending decisions if they were to control their own assets. 

Discretionary Trust: Cons

Ongoing costs

Any income earned by the trust, not distributed to beneficiaries can incur the highest marginal tax rate.

If you do find you are making major profits as a family trust, those profits must be allocated to beneficiaries. You could run out of beneficiaries and those beneficiaries will be paying highest tax rate.

With a family trust, you can add additional beneficiaries if the trust deed allows for it, but you must be careful as capital gains tax and stamp duty may triggered if done incorrectly.

The trust cannot allocate tax losses to beneficiaries either.

Family Matters

There can be challenges in running the trust when other family members as issues occur.

There can also be complexities regarding succession planning and asset allocation upon the death of the trustee.

With a Will, you can dictate what goes to who, however, a family trust is separate to an individual’s will and you may be able to choose who controls the trust, you do not dictate how they control it.

Maintenance

A family trust requires on-going accounting and tax advice throughout its life. These costs can differ depending on the trust. However, this can increase maintenance costs as a trust becomes more complex.

What is a Fixed Unit trust?

A fixed unit trust is a trust where the rights of the beneficiaries (unit holders) to income and capital are fixed. This is in the sense that they are not subject to any discretions on the part of a trustee, and those rights are divided amongst the beneficiaries based on how many units have been issued to them.

A fixed unit trust is where the unit holders, who are all un-related members of two or more separate families getting together to hold an asset together (usually a large property or shareholding) or run a business together. The trustee has no discretion on which unit holder gets which distribution portion of income or capital of the trust. All income and capital are distributed according to unit holding.

The trustee owns the property of the trust and distributes each year, income of the trust, to various unit holders with a common purpose. This common purpose includes minimizing the total income tax, capital gain tax and asset protection. No income of the trust can accumulate in the trust. All income of the trust must distribute each year.

The trust runs for up to 80 years. This termination date or “vesting day”, which is when one or more-unit holders are entitled to the whole of the trust fund according to their unit holding. Until that day, the assets under the trust are held by the trustee.

In a fixed unit trust all units have the same rights to income and capital distribution and voting rights in a meeting.

What is a unit?

A unit is a piece of property that entitles the unit holder to a specified proportion of the income and capital of the trust.

A unit held under a trust is different from a share in a company. A share confers on the holder no legal or equitable interest in the assets of the company; Units under the fixed trust deed confer a proprietary interest in all the property which is subject to trust of a deed.

In other words, a unit in a fixed unit trust confers on the unit holder an equitable interest in both the underlying capital and the income of the trust.

Who controls the fixed unit trust?

The unit holders as a group control the trust. This is because the trust deed gives them the power to direct the trustee and if necessary, dismiss the trustee and appoint another person to act as the trustee instead.

The deed specifies the percentage vote required for a resolution of a meeting of unit holders to be effective. Usually, it is 75% unless the unit holders decide otherwise.

Instead of beneficiaries, unit trusts have unit-holders. Unit holders,  are all predominantly un-related members of two or more separate families getting together to hold an asset together (usually a large property or shareholding) or run a business together.

All income and capital is distributed according to unit holding, rather than by the discretion of the trustee, which is why Unit Trusts are also referred to as "fixed' trusts.

The unit holders as a group control the trust. This is because the trust deed gives them the power to direct the trustee and if necessary, dismiss the trustee and appoint another person to act as the trustee instead.

The deed specifies the percentage vote required for a resolution of a meeting of unit holders to be effective. Usually it is 50% unless the unit holders decide otherwise.

Fixed unit trust: Pros

Fixed Unit trust structures have several advantages over other tax structures like, partnership, company etc, however it has its own limitations. Below is a list of advantages, please note that this list is not exhaustive, you must seek your own independent legal and accounting advice.

Tax Advantages

Unlike a company, a Unit Trust does not have to pay any tax. The beneficiary must pay income tax on the proportional profits they derive from the trust. Similarly, trusts enjoy a 50% Capital Gains Tax discount regarding disposal of assets, which can be passed on to the beneficiaries if the trust is structured accordingly.

Asset Protection

Unit trust holders also enjoy asset protection from internal, as well as external parties. As none of the beneficiaries hold legal rights in the trust property, they cannot claim the trust’s assets.

Consequently, if any of the beneficiaries cannot pay off their debts, the creditors cannot seize the trust property as compensation. Similarly, if one of the beneficiaries’ is involved in court proceedings such as divorce, the court cannot direct the trust’s assets towards satisfying the spouse’s claims.

Deregulation

A trust, unlike a company, is not as heavily regulated. While a Company needs to comply with regulations monitored by legislation, ASX and ASIC, trusts do not have such limitations. They are also easier to wind up than companies.

Fixed unit trust: Cons

Potential loss of control

As none of the Unit Trust holders have legal rights over the trust, they are at the mercy of the trustee. A trustee being the only decision-maker and legal rights holder, might make decisions that the beneficiaries do not always agree with. Or the trustee’s decisions might lead to a loss, that cannot always distribute amongst the beneficiaries. Consequently, they might feel a loss of control over their own assets.

There are remedies available for a breach of trustee’s duties, but the process is frustrating and time consuming, as well as expensive.

Costs

Setting up a Unit Trust could have massive monetary ramifications. They are traditionally more expensive to set up than a sole trader, or even a company.

Additionally, the beneficiaries might be subject to PAYG calculations. If their income is higher than a certain amount, they would end up paying a higher tax amount than the company tax.

TRUST ABNs

ABNs are not compulsory. However, there are many good reasons to have one - for example, ABNs help you:

• To deal with the ATO; and
• In dealing with other businesses when supplying goods or services to them, or when purchasing goods and services.

Also, you need an ABN to register for GST. Entities carrying on an enterprise in Australia with a GST turnover of $75,000 must register for GST.

A trust must meet either one of the following 2 criteria to be eligible for an ABN:

Criterion 1

The entity is any one of:

• A company incorporated under the Corporations Act 2001 in Australia;
• A charitable institution or trustee of a charitable fund in Australia;
• A deductible gift recipient in Australia; or
• A religious institution in Australia.

Criterion 2

The entity can answer 'Yes' to each of the following statements:

1. Its activity is carried out in any of:

• The form of a business
• The nature of trade, or
• The form of a regular or continuous grant of a lease, licence or interest in property.

2. Its activity is carried out in Australia or it makes supplies that are connected with Australia.

3. Its activity is not a private recreational pursuit or hobby

After acquiring an ABN and a TFN, the trust can then open a 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.

What is Stamp Duty?

Stamp duty is tax that state and territory governments charge for certain documents and transactions.

How much stamp duty do I have to pay?

Different stamp duty charges apply depending on where you live in Australia. By using an online Stamp Duty Calculator, you can see exactly how much stamp duty applies to the property you plan to purchase.

The amount you need to pay may also depend on:

• The type of property you are buying, i.e., a primary residence or investment property
• Whether or not you are a first home buyer
• Whether you are purchasing an established home, new home, or vacant land, and
• Whether you are classified as a foreign purchaser.
  

When you register your Trust Deed, paying stamp duty, Depends on the rules of a State or Territory. The state or territory you live in can incur stamp duty, below is a table outlining the cost of stamp duty within each state and when you need that stamp by:

To get your stamp duty, simply go into your State or Territory State Revenue Office.

So… why not get started with your Trust Deed registration? Fill in our online Trust Deed registration form.