10. Trusts

Question 1

Was is the purpose of a trust?

Answer 1

A trust is an equitable obligation binding a person (the trustee) to administer the property (trust
property) under the terms of a trust deed for the benefit of the beneficiaries of the trust.

Question 2

What are the four essential elements of a trust?

Answer 2

• • Trustee.
• • Trust property.
• • Beneficiary.
• • Obligation in respect of the trust property.

Question 3

What is an appointer in trusts?

Answer 3

The person nominated in the trust deed as having the power to remove or appoint trustees

Question 4

What is the beneficiary in trusts?

Answer 4

The person who is entitled to, or who may become entitled to, a share of trust income
or property

Question 5

What is the guardian in trusts?

Answer 5

The person nominated in the trust deed as having the power to veto the exercise by the trustee
of certain powers

Question 6

What is the settlor in trusts?

Answer 6

The person who creates the trust. This person provides the initial trust property to create the
trust. A trust does not exist without trust property

Question 7

What is the trust deed in trusts?

Answer 7

Broadly, the document that contains the rules governing the operations of the trust relationship
and the duties and obligations of the trustee and that identifies the beneficiaries and sets out
their rights

Question 8

What is the Trustee in trusts?

Answer 8

The person or entity (often a company) who controls or administers the trust and trust property in accordance with the trust deed. In s. 6(1) ITAA 1936.
The trustee is the legal owner of the trust property, which comprises the initial settled sum together with any additions

Question 9

Is the trustee personally liable for debts of the trust?

Answer 9

Yes.
Although they are entitled to be indemnified out of the trust property in respect of liabilities incurred in the
proper exercise of the trustee’s powers (except where a breach of trust has occurred)

Question 10

Whats is a vest in trusts?

Answer 10

To vest a trust means to wind it up, or for the trust to cease. The vesting period refers to the life
of the trust and is usually either a period no longer than 80 years, or the period ending 21 years
from the death of someone living at the time of creation of the trust

Question 11

Does the Trust pay tax?

Answer 11

No, it is required to have a TFN and also an ABN if carrying on business.
But the net income (taxable income) is in the hands of the beneficiaries and depends on their individual tax rate

Question 12

How does residency apply to trusts?

Answer 12

The residency of a trust depends on the residence of the trustee or the
central management and control of the trust (s. 95(2) and (3) ITAA 1936)

Question 13

How are net losses in trusts treated?

Answer 13

Net trust losses are carried forward by the trust and cannot be allocated to beneficiaries. To utilise a carry forward net trust loss, a trust needs to satisfy additional rules

Question 14

Can a trust be registered for GST?

Answer 14

A trust that carries on an enterprise can be registered for GST

Question 15

Does a trust have to pay FBT?

Answer 15

A trust that is an employer can provide a fringe benefits to an employee (or their associate) and may be subject to FBT

Question 16

Can a trust be a SBE?

Answer 16

A trust that carries on a business may be classified as an SBE and choose to apply the available SBE concessions

Question 17

Can a trust be a PSE?

Answer 17

A trust may be classified as a PSE and subject to the personal services income (PSI) rules where it is not a personal services business (PSB)

Question 18

How does a resident trust treat Capital gains events?

Answer 18

A trust must follow the method statement in s. 102-5 to determine the net capital gain included in its net income/loss
A trust can generally apply both the CGT general 50% discount and the SBE CGT concessions (where relevant)

Question 19

How does a non-resident trust treat Capital gains events?

Answer 19

• • Only capital gains on taxable Australian property are taken into account when working out the net capital gain/loss for the trust (TD 2017/23)
• • Amounts attributable to capital gains on non-taxable Australian property will be assessable upon distribution to an Australian resident beneficiary. However, the amounts will not be treated as capital gains of the Australian beneficiary and therefore cannot be reduced by the CGT general 50% discount or by capital losses (TD 2017/24)

Question 20

How goes CGT apply to the beneficiaries of a trust?

Answer 20

Special rules apply to allow a trust to allocate net capital gains to particular beneficiaries (i.e. the streaming rules for capital gains)
A net capital gain allocated to a beneficiary retains its nature as a capital gain in the hands of the beneficiary. However, to determine a beneficiary’s net capital gain the CGT concessions applied by the trust must be reversed.
The beneficiary must then determine their entitlement to the CGT general 50% discount and the SBE CGT concessions (where relevant) based on their own tax profile

Question 21

If a trust receives a franked dividend from an Australian company, what does it include in its net income?

Answer 21

The dividend amount and the franking credit

Question 22

How does a trust pass on franking credits to beneficiaries?

Answer 22

Special rules apply to allow a trust to allocate franked dividends and the attaching franking credit to particular beneficiaries (i.e. the streaming rules for franked dividends)

Question 23

Is a non-resident beneficiary entitled to a franking tax offset?

Answer 23

No

Question 24

What is deemed to be NANE income of a non-resident beneficiary?

Answer 24

Interest, dividends (unfranked portion), and royalties allocated to a non-resident beneficiary are subject to withholding tax and a deemed to be NANE income

Question 25

How does a trust treat foreign income?

Answer 25

A trust includes gross foreign income (i.e. net income grossed-up for foreign taxes withheld) in its net income, unless an exemption applies

Question 26

How are beneficiaries to treat foreign income received by the trust?

Answer 26

There are no special rules that allow a trust to allocate foreign income and attaching foreign income tax offsets (FITOs) to particular beneficiaries (i.e. there are no streaming rules for foreign income). Therefore, each beneficiary is allocated a share of the trust’s foreign income

Question 27

What are the four most common types of express trusts?

Answer 27

Discretionary trust
Fixed trust
Unit trust
Hybrid trust

Question 28

What is a discretionary trust?

Answer 28

This can sometimes be called a ‘family trust’ or a ‘non-fixed trust’
Distributions to beneficiaries are totally up to the trustee.

Question 29

What is a fixed trust?

Answer 29

A trust under which the beneficiary’s entitlements to share in the income or capital of the trust are fixed under the terms of the trust deed

Question 30

What is a unit trust?

Answer 30

A type of fixed trust under which the unit-holder’s capital and income entitlements are determined in proportion to the number of units held in the trust. Unit trusts are commonly used where investors, who are not related to each other, wish to pool their resources to purchase property or other forms of investment. Investors in a unit trust may sell their interest in the unit trust by selling units to new investors

Question 31

What is a hybrid trust?

Answer 31

A trust that has features of a fixed trust or a unit trust and a discretionary trust

Question 32

What is a Managed Investment Trust?

Answer 32

An MIT is a widely held and commercially operated trust that invests in primarily passive activities, such as shares, property or fixed interest assets. There are specific non-resident tax rules for MIT’s

Question 33

In what situations cant a prior-year loss be offset against the income of a trust due to a beneficiary?

Answer 33

• • Loss is required to be met out of corpus (capital).

* • Beneficiary has no interest in the capital of the trust.

Question 34

What are the two ways of distributing the net income of a trust?

Answer 34

Proportion (calculating by the % owned by the beneficiaries)
Monetary distribution
Story of the trustee that failed to report $9k of interest but it was not distributable to the beneficiaries because the original income was distributed by monetary distribution. If it was proportionate it would follow the same %