Types of trusts
When it comes to trusts in Australia, they come in a variety of shapes and sizes plus one size doesn’t fit all. There are numerous factors to consider when choosing a trust that suits you and your circumstances.
What is a trust?
Believe it or not there are a number of misconceptions about what a trust actually is. For example, a common misunderstanding is that a trust is a legal entity like a person, company or individual. This in fact is not the case. A trust is in essence a relationship that is recognised and applied by the courts.
Put simply, a trust is a relationship where A holds property for the benefit of B. A is known as the trustee and is the legal owner of the property which is held on trust for the beneficiary B. The trustee can be an individual, group of individuals or a company. There can be more than one trustee and there can be more than one beneficiary. Where there is only one beneficiary the trustee and beneficiary must be different if the trust is to be valid.
The courts strictly enforce the nature of the trustee’s obligations to the beneficiaries. This means although the trustee is the legal owner of the relevant property, the property must be used only for the benefit of the beneficiaries. Trustees have what is known as a fiduciary duty towards beneficiaries and the courts will enforce this rigorously.
The following types of trusts are the most commonly created;
- Bare trusts
- Business trusts
- Charitable trusts
- Discretionary trusts or Family trusts
- Fixed trusts
- Special Disability Trust
- Superannuation trusts
- Testamentary trusts
- Unit trusts
Below, we go into more detail about these types of trusts in Australia. If you have questions, please contact the CVW Accounting team – we’re more than happy to help.
Bare trusts
A Bare Trust has only one trustee, one legally competent beneficiary and no specified obligations and the beneficiary has complete control of the trustee. An example of a bare trust is a nominee shareholding – that’s where a shareowner holds shares on behalf of someone else who does not want to be identified.
What is a Business Trust?
Firstly, there are various types of asset holding, licence and service trusts that can be created for a business. However, business trusts are essentially used to manage and protect the business from loss due to lawsuits filed by employees, clients, and creditors.
Secondly, a business trust in Australia is used to separate personal from business assets and ensures family assets are out of reach if the business is sued or files for bankruptcy. Similarly, a business trust means business assets are protected if you are personal sued.
Finally, with a business trust, profits can be distributed tax effectively to reduce taxes and increase net business profit. Also. business trusts can provide further access small business tax concessions i.e. if you sell your business, you could be exempt from capital gains tax.
A closer look at Charitable trusts
Charitable Trusts provide a pathway to establish philanthropic trusts which have concessional taxation rates and deductions to taxpayers for gifts to such trusts.
The following are two types of charitable trusts in Australia;
- Private Charitable Foundation – this type of trust is a private charity that is not required to seek donations from the public or be controlled by a committee. It can have a Trustee, or a committee of Trustees if the Trustee or one of the Trustees is a person who has a general responsibility to the community and is not associated with the founder or a major donor. This Trust is only permitted to distribute money, property or benefits to charities which have deductible gift recipient status or to establish such recipients. These Trusts are called Prescribed Private Funds.
- Charitable Trusts with gift deductible status – this type of trust is a public charity that is required to seek public donations. This trust must adhere to strict requirements in order to obtain and maintain a gift deductible status.
It must be established for genuine charitable purposes within Australia. The Trustee must be a committee of persons a majority of whom have a general responsibility to the community or a company the directors of which satisfy that requirement (a committee or board of at least 5 is recommended).
Application must be made to the Australian Tax Office (ATO) for approval as a gift deductible recipient. These types of trusts are called Public Charitable Trusts.
What is a Discretionary or Family trust?
As the name indicates this type of trust is specifically suited to families.
Family trusts are established to manage, protect, and pass on family assets including shares, personal property, and the family’s business from one generation to another.
Income and capital gains can be distributed at the trustee’s discretion to any family member. Family members might include your own family lineage along with your partner’s parents, children, grandparents, brothers, sisters, nephews, nieces, and their spouses.
Fixed trusts in Australia
A fixed trust is when the trustee holds the trust assets for the benefit of specific beneficiaries in certain fixed proportions. In such cases the trustee does not have to exercise a discretion since each beneficiary is automatically entitled to his or her fixed share of the capital and income of the trust.
Special Disability Trust
This type of trust can be established to help family members and caregivers provide for the future care and accommodation needs of disabled or vulnerable family members. They can also attract social security means test concessions for the beneficiary and those family members establishing the trust.
Superannuation Trusts
All superannuation funds in Australia operate as trusts. The deed (or in some cases, specific acts of Parliament) establishes the basis of calculating each member’s entitlement and sometimes the contributions that have to be made for a member. While the trustee usually retains responsibility for the fund’s investments and selection of a death benefit beneficiary.
The Federal Government has legislated to establish standards that all funds for which tax concessions are sought, must comply. For instance, ‘preservation’ conditions under which a member’s benefit cannot be paid until a certain qualification has been reached like reaching age 65.
Details about Testamentary Trusts?
This particular trust is created based on instructions from a Last Will and Testament – thus the name.
It also means the trust does not exist until the person making the arrangements passes away.
Then, rather than the deceased person’s assets being distributed directly to beneficiaries, assets are held in trust on behalf of those beneficiaries. Based on the deceased’s rules and conditions, funds are then distributed.
These types of trusts can protect assets a beneficiary may receive in the event of bankruptcy, business lawsuit or relationship breakdown. Unlike discretionary family trusts, minors receive the adult tax-free threshold. This means trust income and capital gains can be tax-effectively distributed among children, increasing the net income distribution to family members.
What is a Unit Trust?
A unit trust is a specific type of trust that divides the beneficial ownership of the trust property into units, similar to how shares are issued to company shareholders. Beneficiaries are usually called unit holders.
It differs from a family (discretionary) trust in that unit trust property is held solely for the unit holder. The trustee doesn’t have the discretion to distribute income or capital among unit holders. Distributions must be allocated in accordance with units held in trust.
It is common for property, investment trusts and joint ventures to be structured as unit trusts in Australia.
Beneficiaries can transfer their interests in the trust by transferring their units to a buyer. There are no limits in terms of trust law on the number of units/unit holders. However, for tax purposes the tax treatment can vary depending on the size and activities of the trust.
Get in touch with CVW Accounting
Phew! There is a lot of information there and to be honest, there is so much more. If you have questions about these trusts or other trust funds you have come across, please get in touch. The CVW Accounting team are happy to discuss the options to best suit your circumstances.
Call 9219 1300 to book a no-obligation appointment.
You may also be interested to learn about the purpose and benefits of a trust.
This blog was first published in February 2021 and has been reviewed and updated in August 2023.
