How do trusts work?

Trust – noun signifying belief, confidence, faith, and (in Australia) a tool for wealth creation

It is said that “There are two certainties in life – death and taxes”. There is one death but there are scores of taxes. No wonder tax is big business. It is all pervasive in modern life. There is no transaction you undertake which is not been tainted somewhere by the tax system be it an impost raised by local , state or the federal government – what with the presence of Income Tax, Capital Gains Tax, Sales Tax, Stamp Duty, Excise Duty, Payroll Tax, Superannuation Government Charge, Land Tax, Property Rates, Petroleum Revenue Tax, Government Royalties etc many of which are collected through pseudo-taxes such as Provisional tax, Prescribed Payment System Tax, Reportable Payments System tax and Withholding tax!

The Australian ethos loves to save every tax dollar it can. Tax planning is an industry in its own right – why else would the Government need to counteract with gobbledegook legislation which runs into thousands of pages and which needs to be translated for the ordinary tax payer by the Australian Tax Office (stating its interpretation of the gobbledegook!) through the issue of hundreds of tax rulings and tax determinations and the Courts handing down an equal number of precedent bearing decisions on taxation matters.

But despite all this overbearing legislation, it is curious that the Australian governments has not yet seriously touched the sacred cow of tax planing in Australia – the Family (Discretionary) Trust. As we all know, the concept of trusts (remember a trust is not a separate legal entity) evolved over the years to ensure that a person (the settlor) could leave behind his property and assets (say on his death or if he was going away for an extended period) with a trusted friend (the trustee) who would administer the property and assets (the trust property) in trust for the settlor’s family (the beneficiaries).

Well only in Australia (which is after all a nation of creative talent when it comes to making a buck!), has the concept of such trusts been extended to ensure that they take advantage of income splitting opportunities available in a family. The incidence of distribution from trusts to beneficiaries is recognised in the Income Tax Assessment Act and Australia is probably the only country in the OECD where family discretionary trusts are employed by families and businesses for tax planning purposes.

These trusts are easy to set up and to manage. Like all good things in life, there is an annual cost associated in maintaining them – and hence one would only contemplate setting them up if the tax savings were expected to outweigh the annual maintenance costs. Even if there are no such immediate benefits, we sometimes advise our clients to consider setting up a trust where long term investments are being contemplated to ensure that one does not fall into an inadvertent unplanned stamp duty / capital gains tax net at a subsequent date.

For further information, you should speak to your professional adviser as to the merits of setting up a discretionary trust to hold your family’s investments or business.