Australia: What is a Trust and how does it help as a structure for your business? Part II

PREAMBLE 

Part Two of “What is a Trust and how does it help as a structure for your business?”

Part Two 

4. How trusts differ from other business structures(i)? 

Unlike a company, partnership or sole trader, a trust must contain all these basic elements: 

(a) Trust Property, 

(b) Trustee, and 

(c) Beneficiary 

A company is formed through the incorporation process, partnership is formed from an express or implied agreement and sole trader is formed from the intention of the owners. Trust is formed through either a declaration or a settlement, however those elements must exist at the time of the declaration or settlement. In Part One we touched on how a Trust integrates with the legal framework. 

5. Why use a trust? 

An unit trust(ii) is similar to a company, it has a fixed portion of entitlements flowing through to Beneficiary. The discretionary trust(iii) or known as a family trust provides the Trustee with power to determine how to distribute the Trust income and capital.

Unit trust is generally used as an investment structure for a group of arm’s length investors while the family trust is for close family members which gives the Trustee flexibility to distribute to Beneficiary. There are other Trusts, i.e. 

a) Trusts imposed by a Court, the constructive trust; 

b) The latest testimony of a deceased person (a Will); 

c) Pension funds also known as a superannuation fund. 

6. How does a trust end? 

A common unintentional ending of a Trust is inadvertently exhausting the Trust Property causing the Trust missing one of its essential elements. The Trust settled sum therefore has to be kept separate and intact at all times. 

The other ways to end a Trust are 

a) when the Trust has reached its specified end date. or 

b) the Beneficiary and Trustee became the same person(iv). 

At that end date, commonly known as the Vesting Date, all assets in the Trust has to be orderly distributed according to the Trust Deed. 

7. What taxation implications or advantages arise from the use of a trust structure?

The primary taxation advantage is the ability to distribute to Beneficiaries and retain the characteristic of that distribution, such as, the source of Trust income is passed onto Beneficiaries which may provide tax benefits to the recipient of the distribution.

The discretionary trust of course would provide differential and flexible distributions to suit its Beneficiaries, however some countries do have rules in relation to income streaming in Trust distributions. 

For foreign passive investors, there are tax advantages for investing in a MIT structure(v). 

There are hybrid structures such as “Anstalt” (establishment of representatives) and

“Stiftung” (a foundation) that operate in most of those German speaking countries. These are structures adding the separation of power, however these are not a Trust as they do not contain the essential three elements. They are generally treated as incorporated or unincorporated bodies taxed under the company tax regime. These hybrid structures (when operating properly) are very tax effective for taxpayers in countries with the worldwide taxation system.

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