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Download the Family Trust - Streaming & Bamford Update Checklist
Download the Family Trust - Streaming & Bamford Update Sample
Recent case law has held that should the power to amend the trust deed be not sufficiently broad, then the trustee may not be allowed to amend the deed in a particular way resulting in the amendment being invalid.
The case of Mercanti v Mercanti [2015] WASC 297 highlights this point.
In that case amendments to 2 trusts were considered. Each trust deed had a different variation clause. One variation clause was broader to the extent that it allowed the trustee to “vary all or any of the trusts, terms and conditions”. The other variation clause was restricted to allowing the trustee to “vary all or any of the trusts”.
The amendments considered in that case were allowed in the trust with the broader variation clause, but not the other.
Please seek legal advice on the important issue of whether the variation clause in your deed allows the amendment contemplated.
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Yes.
A Discretionary Family Trust, a Family Trust and a Discretionary Trust are all the same thing.
This kit works for all of them.
However, these trusts are different:
* Unit Trust;
* Hybrid Trust;
* Bare Trust.
You can't use this kit for them. They require a lawyer.
Note: To muddy the waters, the Australian Tax Office allows you to take up a 'family trust election'. (A very poor use of words, in my view.) This is where you dramatically and sadly reduce your beneficiaries down from 1,000s to just the immediate family. This allows you to do things like carry forward large losses - but to a large extent it destroys the value of a Family Trust.
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The family trust is considered the most flexible business and investment structure in Australia.
There are many commercial and tax advantages. They are useful for both trading and investment:
* Limited liability
In a Company, the director (and any one acting like a director) often goes down with the company when the company can’t pay its debts. However, in a Family Trust, the Family Trust can run out of money and no one goes down with the trust. The Settlor, Trustee, Appointor and Beneficiaries aren’t usually exposed to the debts of the Family Trust.
Exposure to liability will occur where; if you guarantee the debts of the Family Trust then you are liable. Also, if the Trustee owns a premises and someone falls over you may be personally liable under occupier’s liability – even though the trustee only holds the premises in trust for the beneficiaries.
You can also put a corporate trustee in as trustee. However, then you have to comply with all the Corporations Law and other complex regulations.
We word your Family Trust so that the Settlor and potential beneficiaries aren’t responsible for the debts and other liabilities of the trust. The trustee is, however, subject to the common law fiduciary duties and state trustee law. Also, if you put in a corporate trustee then you have to suffer all the compliance work under the Corporations Act as well.
* Confidentiality of trading results
A trust (including a discretionary trust) is not subject to the over regulation that companies suffer. Apart from lodging a tax return (which is confidential) no one knows your business. Compare this to a Company. A Company each year has to provide confidential information about itself. Much of that information is searchable and in the public domain. People regularly trawl these public records looking for information about you. A Company is everyone's business. A trust, on the other hand, is private.
* “split” income
Of all the tax benefits in a trust this is the greatest. Each year you hunt down from your group of beneficiaries (which is 100s of people) those that are paying tax at low rates. For example, you can distribute $6,000 to your 18-year-old daughter at university; if she has no other income then the tax on this is zero. (She of course shouldn't ever see the money. It is just a book entry.) Even if you have only yourself you can still distribute to a company and only pay tax at the corporate tax rate of 30%. Therefore, each year you are able to change who gets the income of the trust to exploit the progressive rates of tax. You can have Company as a beneficiary. The Company need not be the Trustee.
* Your son a beneficiary goes bankrupt
That is fine. Until your son went bankrupt you were making distributions to him. In future you just don’t make distributions to him while he is bankrupt. The assets in the trust are protected. The trust may lose your son's loan accounts. (This is where your son gifted or lent money to the Trust then that money may be lost to your son's Trustee in Bankruptcy.)
* The Trustee or a Director of a Corporate Trustee goes broke
What if a director of the Corporate Trustee goes bankrupt? What if the Corporate Trustee becomes insolvent? As Appointor (remember the Appointor is God) you sack the director and merely appoint a new trustee.
* Increase or reduce capital
The Appointor can instruct the Trustee to accept more funds into the trust. The trustee can also “vest” (give) capital amounts in any of the beneficiaries at any time. (When you move or transfer an asset to anyone you have to consider Capital Gains Tax, state duties and other taxes.)
* Ability to distinguish between income and capital beneficiaries.
This is another great tax saving power. One beneficiary may want a capital loss (to offset his capital gain). Another beneficiary may have a low income and can take income without paying much tax. We draft your Family Trust so that your accountant pays capital to one beneficiary and income to another.
* “Attribution” of different “income classes”
Sorry, this is getting a bit technical. Our trust deed provides for the "attribution" of different classes of income and capital. A distribution of a class of income (like franked dividends) can be made to one beneficiary. The beneficiary gets with that money the “attributes” of that particular class of income flowing through. A company can’t do this.
* Death duties
When you die your assets stay in your Family Trust. Whoever is your next Appointor controls them. This avoids Capital Gains Tax and state duties.
* Useful for generations to come
We draft your Family Trust so that when your grandchildren have children then those people automatically become beneficiaries of your Family Trust. We set up wide classes of beneficiaries. For example, if you set up a company and you are a shareholder, then that company automatically becomes a beneficiary of the trust without any re-settlements issues.
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No. There are on average over a 1,000 beneficiaries in most Family Trusts. They include great, great, great grandfather that may have died hundreds of years ago. They include great, great, great grandchildren that will not be born for a 100 years.
The more beneficiaries the better. If the law allowed, we would make every person ever born and ever person yet to be born as beneficiaries. Sadly, the law does not allow us to do this.
The only people who sign this update are:
1. the Trustee(s); and
2. the Appointor(s).
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If you previously changed the Trustee by a Deed of Variation you will have to put the date of that deed in the "deed update" box.
The next page asks you about the Trustee's name, etc.
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You need to get a lawyer to do your amendment.
You can contact Law Central Legal on (08) 9476 4999.
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Usually, the very first page of the trust deed tells you who the Trustee is.
You should see something like:
* Jonathon Smith of 1 Jones Road, Sydney ("Trustee")
or
* NYC Pty Ltd of 2 Hamilton Street, Melbourne ("Trustee")
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That's OK.
Enter the name of the company first, followed by the ACN preferably in brackets.
For example:
'ABC Pty Ltd (ACN 123 456 789)'
'Acme Pty Limited (ACN 333 222 999)'
Do not use the ABN number. This is not the same as the ACN. Only companies with an ACN can be a trustee.
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The Trustee:
1. Cannot be the Settlor of the trust (the Settlor is named in the trust deed).
2. Must be over 18, if it is a person.
3. Can be a company. But only a company with an ACN (Australian Company Number).
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You need to look in the trust deed.
Usually, the Appointor is found in the:
1. Definitions section; or
2. Schedule, at the back of the deed.
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Strictly speaking, an Appointor and a Guardian have different jobs. However, in most modern trust deeds the Appointor and the Guardian are the same person.
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You need to get a lawyer to update your trust deed. Don't go any further.
Your Moderator or Controller (or other strange title) probably does the same job as an Appointor or Guardian. However, there may be important differences. You should contact Law Central Legal on (08) 9476 4999 and they can help you.
This hint is provided by Law Central Legal.
You need to get a lawyer to update your trust deed. Don't go any further.
Your Moderator or Controller (or other strange title) probably does the same job as an Appointor or Guardian. However, there may be important differences. You should contact Law Central Legal on (08) 9476 4999 and they can help you.
This hint is provided by Law Central Legal.
You need to look in the trust deed.
Usually, the Guardian is found in the:
1. Definitions section; or
2. Schedule, at the back of the deed.
This hint is provided by Law Central Legal.
The Law is constantly moving in relation to trust and how it will be seen by the ATO and the Courts. This update brings your Trust up to date with recent developments in case law and ATO interpretation, eg Income Equalisation (known as Bamford update), Capital Gains Streaming provisions, Franked Dividends Streaming Provisions and Attribution provisions.
What are the Capital Gains Streaming provisions?
The Tax Laws Amendment (2011 Measures No. 5) Act 2011 (“Act”) amended the taxation of capital gains to ensure trustees can “stream” taxable capital gains and franked dividends to beneficiaries. “Streaming” refers to the practice of allocating specific capital gains or franked dividends to specific beneficiaries.
“Streaming” allows you to avoid unnecessary capital gains and income tax being payable by the trustee and beneficiaries of the trust. If there is no streaming of taxable and discounted components of capital gains and the taxable net income of the trust (which includes taxable net capital gains) exceeds the trust distributable income, the assessable income of a beneficiary could be more or less than the amount received from the trust by such beneficiary.
This update makes sure the beneficiaries of your trust can be “specifically entitled” to a capital gain.
What are the Franked Dividends Streaming provisions?
At times your trust may include gross income from franked dividends. A resident beneficiary in your Family Trust (other than a trustee of another trust estate) is entitled to franking credits if they are “specifically entitled” to the franked dividends.
If there is no streaming of franked dividends and the taxable net income of the trust (which includes a franked distribution) exceeds the trust income, the assessable income of a beneficiary could be more or less than the amount received by such beneficiary.
This update makes sure the beneficiaries of your trust can be “specifically entitled” to a franked distribution.
What are the Attribution provisions?
Attribution allows you to identify certain classes of income from your trust. You can then allocate portions of these income classes to different beneficiaries. Attribution enables the trustee to distribute income classes to the beneficiaries who are able to best utilise their characteristics. Because of the progressive tax scales in Australia people pay less tax the smaller their net income. For example, the first $6,000 is tax-free. On the other extreme, from $80,000 up to $180,000 the tax rate is 37% (38.5% with Medicare), and from $180,000 the tax rate is 45% (46.5% with Medicare).
Consider the quarantining of capital and revenue losses. If you can keep them separate then a capital gain to a beneficiary with a capital loss is more valuable in after tax dollars than to a beneficiary with revenue losses.
Sure, both beneficiaries could utilise their losses to reduce tax on the distributed capital gain, the relative "rarity" of capital gains as compared to revenue gains means there is a value to the preservation of the revenue loss.
Attribution is only possible if the power was put into your Family Trust. Rest assured that we will put it in your Family Trust. It is then up to you and your accountant to make sure that you have good book keeping records so that the income is traceable in the accounts of the trust to the ultimate beneficiaries.
Some accountants prefer each class of income to be paid into a separate account, and distributions to beneficiaries to be paid from the appropriate account. The Family Trust allows this.
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Yes. Division 115 of the Income Tax Assessment Act 1997 provides that when calculating the net capital gain, your Family Trust gets the 50% CGT discount. This is provided you meet the other general rules.
BUT DOES THE BENEFICIARY ALSO GET THIS DISCOUNT?
Unlike a company the answer is, yes.
When the net income of the trust (incorporating the discounted capital gain) is later distributed to a beneficiary, the beneficiary gets the additional "gross up" amount in their assessable income (referable to the discount claimed in the trust).
If the beneficiary would have qualified for the discount had the beneficiary derived the gain (and not the trust), then the beneficiary may reduce the gain once again in its own right. The beneficiary therefore preserves the benefit of the discount.
However, if the beneficiary would not have qualified for the discount, then the discount remains reversed, i.e. the beneficiary does not have the benefit of the discount.
Therefore, your Family Trust doesn't get in the way of the 50% CGT discount to those that qualify for the discount. It is as though the beneficiary held the asset directly.
WHO ELSE CAN GET THIS 50% CGT DISCOUNT?
Only individuals, Family Trusts, Unit Trusts and superannuation funds get the relief. Companies can't get it through to their shareholders.
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If your existing deed talks about Trust Income or Distribution of Income in more than one clause (like in older versions of the LawCentral Family Trust Deed), simply list all clauses numbers, for example “3 and 4”.
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This document has been prepared by Law Central Legal
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