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Guide on Trust Funds – Part 6

The appointor(s)

The appointors (or appointor) of a trust have the real power and control of the assets of a trust, since the appointors have the power to appoint and remove trustees. In many cases, the original appointors include the one or more of the parties for whose benefit the trust is established.

If there is no appointor named in the trust deed, the trust deed may allow the trustee to exercise the powers of the appointor.

Who should be the appointor?

As the real control of a trust lies with the appointor, extreme care should be taken in choosing the appointor.

Consideration needs to be given to the following points when deciding on an appointor:

independent appointor. For example, three joint appointors, being the husband, wife and an independent appointor, such as the family solicitor or accountant.

The trust fund

The trust fund is all the property of the trust including the settled sum, income accumulated and any other money and property held by the trustee pursuant to the terms of the trust.

The beneficiaries

The beneficiaries are the people (including other entities, such as companies) for whose benefit the trustee holds the property. As mentioned previously, a person to whom the trustee can distribute income or corpus (capital) is a potential beneficiary. A potential beneficiary becomes a beneficiary on the distribution of (i.e., on the exercise of the trustee’s discretion to distribute) the income or capital of the trust.

There are different types of beneficiaries, including:

Care should be taken when a major restructure of the beneficiaries is proposed. The risk is that such a change could mean the trust becomes a whole new trust – triggering capital gains tax (CGT) and/or stamp duty consequences.

Guide on Trust Funds – Part 7

Why can’t a sole trustee be a sole beneficiary?

The sole trustee cannot be the sole beneficiary because a trust is a legal relationship between a trustee and the beneficiary or beneficiaries.

If a sole trustee were also the sole beneficiary, then this would be an agreement that a person had with themselves. The law says that no trust can exist in these circumstances.

However, a trustee can be a beneficiary of the trust as long as there is at least one other beneficiary as well.

Can an estate be named as a beneficiary?

No. A person’s estate does not exist until a person dies. So an estate cannot be named as a beneficiary as an estate is not a person.

Can I name a charitable entity as a beneficiary?

Yes, you can name a charitable entity as a beneficiary – but you must be specific (or else the trust might be void for uncertainty). You need to decide exactly who you wish to benefit and in what capacity they are acting (eg: company, trustee etc.) so you can

specifically name the body that will benefit from the trust.

For example, you can’t just name ‘the green movement’ as the beneficiary. You need to name the entity precisely, for example: “World Wide Fund for Nature Australia”.

Can a trust be a beneficiary under the discretionary trust?

No (but see next 2 questions). A trust cannot be a beneficiary under a discretionary trust because the law says a trust is not a separate legal person. For example, the ‘John Smith Family Trust’ cannot be named as a beneficiary of another trust.

Even so, the trustee of a trust, in his, her or its capacity as trustee, is capable of being a beneficiary of a trust – see next question.

Can a trustee be a beneficiary under a discretionary trust?

Yes, the law allows a trustee to be a beneficiary of a trust – as long as you include the trustee’s name and their capacity. For example:

‘John Smith in his capacity as the trustee of the John Smith Family Trust’ In this case, the trustee is effectively a beneficiary of the discretionary trust for the beneficiaries of the trustee’s own trust.

(The trust itself cannot be named as a beneficiary as it is not a legal entity.).

Does the settled sum have to be transferred into a bank account or can it be settled with cash?

It is preferable to transfer the settled sum into a bank account. However, the settled sum does not have to be transferred into a bank account.

As long as the settled sum is kept separate from the other property of the trustee.

Why can’t a beneficiary transfer their “interest” under a discretionary trust to someone else?

A beneficiary can’t transfer their “interest” under a discretionary trust to someone else because until the trustee resolves to make a distribution in favour of that beneficiary, (or any beneficiary) that beneficiary’s “interest” isn’t a real “interest” or “right”. Instead, it is what the law calls a “mere expectancy” – which can’t be transferred.

Guide on Trust Funds – Part 9

The franked dividend streaming rules

The capital gain streaming rules

Guide on Trust Funds – Part 12

About Land Tax

Land tax is a tax levied on the owners of land in New South Wales (NSW) as at midnight on the 31 December of each year. Land tax applies to land regardless of whether income is earned from the land.

Who needs to pay?

You may need to pay land tax if you own, or jointly own, any property in NSW that is NOT your principal place of residence (your home) or other exempt land as at midnight on 31 December and the total taxable value of your land is greater than the land tax threshold.

For land tax, an owner is defined as any of the following:

2014 Rates and Thresholds

Tax Year Threshold Rate
2014 $412,000 $100 + 1.6% up to the premium threshold
  $2,519,000 and over (Premium threshold) $33,812 for the first $2,519,000 then 2% over that

How is the value of my land determined?

The Office of State Revenue use land values supplied by the Valuer General, who values your land as at the 1 July. They use the valuation for the year before the tax year, for example, the 2012 value is used for the 2013 tax year.

To determine the value of your land, the land value for the current tax year and the land values for the previous two tax years are added up, then the average is calculated.

Trust Funds

For land tax purposes, trusts can be divided into six categories:

A special trust is a trust where the trustee is the only person who meets the definition of ‘owner’ for land tax purposes, and the beneficiaries are not considered to be owners. If a trust does not meet one of the following trust definitions, it is a special trust.

Examples of special trusts include most family trusts, discretionary trusts, some unit trusts and some trusts created by a will.

The land tax threshold does not apply to special trusts, which are taxed at a flat rate of 1.6 per cent for amounts up to the premium land tax threshold and then at 2 per cent thereafter.

The following trusts receive the land tax threshold:

A fixed trust is a trust where the beneficiaries are considered to be owners of the land at the taxing date of midnight on 31 December prior to the tax year. This is because they are presently entitled to the income and capital of the trust and these entitlements cannot be varied by the trustee in any way. Fixed trusts include some unit trusts and bare trusts.

A superannuation trust is a complying superannuation fund, a complying approved deposit fund or a pooled superannuation trust under Sections 42, 43 and 44 respectively of the Superannuation Industry (Supervision) Act 1993 of the Commonwealth.

A trust created by a will is entitled to the threshold. However, if the trust is a testamentary discretionary trust, it will become a special trust 24 months after the date of death of the testator, or such further period as approved by the Chief Commissioner.

Guide on Trust Funds – Part 11

Bamford v. Commissioner of Taxation:

Anti-avoidance rules

The changes also introduce two specific anti-avoidance rules.

  1. The first rule, the pay or notify rule (s 100AA ITAA1936)

Generally, it applies where an exempt beneficiary has not been notified of or paid their present entitlement to income of the trust estate within two months of the end of the income year. In this circumstance, they are treated as not being – and never having been – presently entitled to that income.

If an exempt beneficiary has not been notified of or paid their present entitlement to income of the trust estate within two months of the end of the income year, they are treated as not being – and never having been – presently entitled to that income.

  1. The second rule, the benchmark percentage rule (s 100AB ITAA1936)

Generally, it applies where an exempt entity’s entitlement to the income of the trust estate (ignoring any franked distributions and capital gains to which any entity is specifically entitled), expressed as a percentage, exceeds a benchmark percentage.

If an exempt entity’s entitlement to the income of the trust estate (ignoring any franked distributions and capital gains any entity is specifically entitled to), expressed as a percentage, exceeds a benchmark percentage, they are treated as not being – and never having been – presently entitled to the percentage share of the income of the trust estate that exceeds the benchmark percentage.

Under both rules, the trustee is assessed on the share of the trust’s taxable income that corresponds to the income to which the exempt beneficiary is taken as not being entitled to.

We have discretion not to apply the anti-avoidance rules if in the circumstances it would be unreasonable for it to apply.

What has not changed

These amendments do not give trustees a power to stream if they do not already have this power, express or implied, under the trust deed. The existing integrity rules (such as the ’45-day holding period’) continue to apply in respect of the streaming of franked distributions – particularly to determine whether the beneficiary can receive the benefit of franking credits.

Trusts affected by the changes

The streaming changes only affect trusts that make a capital gain or that are in receipt of a franked distribution for the 2010-11 or a later income year. In income years in which the trust does not make a capital gain or receive a franked distribution, the streaming changes will not affect how tax law applies to the trust.

If your trust makes capital gains or receives franked distributions but no beneficiary is made specifically entitled to any capital gain or franked distribution, the changes should generally produce a similar result to that achieved in the past.

The new anti-avoidance rules may apply where an exempt entity, other than an exempt Australian government agency, is a beneficiary of a trust and is entitled to income of the trust.

When the changes apply from

For trusts with a 2010-11 income year that started on or after 1 July 2010, the changes apply from the 2010-11 income year.

Trustees of a trust with a 2010-11 income year that started before 1 July 2010 (an early balancing date) can choose to apply these changes for the 2010-11 income year. They must make their choice in writing on or before 29 August 2011.