Discuss About The Powers Dismantle Discretionary Structures?
In Australia, there are different kinds of business structures which can be opted for pursuing the business and one of these is trust[1]. A trust can be defined as a fiduciary relationship present in which one is known as the settlor, who gives the other party, which is trustee, the right of holding the title to assets or property for benefitting a third party, which is known as a beneficiary. The debts of the company are the responsibility of the trustee. The trust form of business structure is established for providing lawful safeguards to the assets of the settlor, for making certain that these assets are distributed as per the wishes of settlors, to reduce paperwork and save time, and in particularly instances, for avoiding or reducing the estate taxes of inheritance[2]. The trust law was introduced back in 1970 by Malcolm EJ Morgan in the nation, who was an accountant profession wise[3]. The Australian trust law follows the English trust law and is amended through the commonwealth and State or Territory legislations.
The rationale for choosing the trust depends upon the numerous advantages which are available, particularly in terms of tax benefits to the trust form of business structure[4]. However, this does not mean that the trusts do not have any disadvantages; some of these disadvantages would be discussed later on in this discussion. In the key characteristics of the trust is the requirement of drawing up a formal trust deed in which is stated, the manner in which a particular trust would be operated, its operations, the need for trustee to fulfil the administrative tasks in formal manner and annually, and the expensive set-up of the trust. But the most important aspect, which pulls people towards trust form of business structure, is asset protection. The rules for the trusts depend upon the type of trust which one opts for. In Australia, there are a range of trusts which includes unit trusts, managed investment trusts, special disability trusts, charitable trusts, and family trusts[5]. In the following parts, a discussion has been carried on these different aspects of trusts, where the focus is laid on the family trusts.
A trust is deemed as a family trust when the trust’s trustee makes a “family trust election”. In order to make this election, the trust has to be controlled completely by a “family group”. The term family trust is used to refer to a discretionary trust which is set up for holding the assets of the family or for conducting the business of the family[6]. In general, these are established for tax purposes or for asset protection[7]. The Australian family trusts generally are established by the member of the family to benefit the members of a family group. They could be the subject of family trust election, through which different tax advantages are provided which is passed by the trust through the family control test and the trust income is distributed between the beneficiaries of the trust and these are the people within such family group[8].
These trusts also assist in protecting the assets of the family groups from the liabilities of one, or a higher number of family members, particularly in the events like insolvency or bankruptcy of the family members. The family trusts provide a method through which, the assets of the family are passed on to the future generations. Lastly, the family trusts provide a manner of accessing such tax treatment which is favourable and which helps in making certain that all the family members use the income tax as “tax free thresholds”. There are a number of other possible benefits in the family trust mode, which includes the avoidance of issues like the challenges to will upon the death of a family member.
There are a number of advantages in setting up a family trust. The first one in this regard is the creditor protection. The assets which are held in trust, in general, are protected from the beneficiaries’ creditors or that of the trustees in a personal manner. In majority of situations, a trust protects the family from the liabilities of the parents, which are personally owed. Another key advantage of family trust is protection against relationship property claims. At times when the personal assets are given by a parent to their children, through a will, such assets may at times become available to the partners of the children. Though, where the assets are owned by the trust or are given to the trust upon the death of the parent, the children can continue to obtain the benefits of such assets, and as these assets do not become a part of the personal property, they cannot be subjected to the claims of the partner of the children[9].
The property is also protected, both from and for the beneficiaries through family trust creation. Where there is a concern regarding the ability of the children to manage their financial affairs and a reluctance is caused to give the assets to the children upon death, best option is to set up a family trust, which can be used by the children in a particular manner and which could in turn help in protecting the long term value of the assets of the family. Creation of family trust also helps in protecting the assets of the family for future generation, particularly from the possible changes in the tax law regime. The family trusts could provide the protection from different kinds of taxes like the wealth tax, which could be introduced in future, or taxes like inheritance tax or death duties. The will of a person can still be rewritten by the court where the court fees its necessary; though, the same cannot be done for trusts. Also, the modern trust deeds allow for right of variation so as to deal with the changes which are brought in the law. Lastly, the family trusts are kept confidential due to them not being registered publically[10].
Apart from these numerous advantages of creating a family trust one must not forget the different disadvantages of opting for such mode of business structure. The first disadvantage is the loss of ownership of assets. When the personal assets are transferred to trust, they become the assets of the trust and the trust has complete control over such assets. Even though an ounce of control can be retained as the power is held regarding the appointment and removal of trustees, of by being trustees themselves, it is crucial to keep in mind that the transferred assets are not the assets of the individual. And in case the person treats the assets as their own, the trust has the option of challenging it as a sham[11].
When a trust is formed, there is a need for time and costs to be allowed for meeting with the yearly administrative and accounting requirements of the trusts. There are also high costs involved when it comes to establishing a trust in terms of cost of formation and cost for transfer of assets. These costs are also dependent upon the complexity of the trust, along with the nature of the assets which are being transferred to the trust. There is also a need to keep in mind the future changes in the law which could remove of cause effect to some of the key objectives of the formation of the trust. So apart from the immediate benefits which can be obtained by forming a trust, there is a need to consider the long term effects of trust formation and the impact of it to make a decision regarding if a trust form of business structure is advantageous or disadvantageous as a business structure[12].
A key advantage of the family trust is the trustee’s ability for selecting the person from whom the net income of the trust would be distributed yearly. The net income of the trust can be distributed between the beneficiaries in such a manner where the total income tax which is payable on it could be minimized. For the tax purposes, a family trust is one where a valid family trust election is made by the trustee and merely including the wordings family trust in the name of the trust does not create a family trust. The valid family trust election is made by the trustee only when they are satisfied regarding the relevant tests, as well as, have made an election in a written manner and in an approved form. Upon this election being made, the same cannot be revoked or varied save for in special situations[13].
The Family Trust Election allows the trust to obtain certain tax concessions. The family trust distribution tax, as a trade off, is imposed when the distributions are made out of the family group. The family trust distribution tax is applicable to the distributions which are made from the family trusts in case the trustee distributes capital or income, or confers a present entitlement, makes a concessional loan or allows or provides otherwise regarding the usage of capital or income of trust for less than the market value of it, to an entity or to a person which is out of the family group of the trust. This tax is payable by the family trust’s trustee at the highest marginal rate, in addition to the levy of Medicare[14].
The Trustee beneficiary reporting rules are such rules which require the trustee to advise the Australian Taxation Office, i.e., ATO regarding some specific details. These details are related to each of the trustee beneficiary which is entitled to the part of a tax preferred amount of the particular trust, or includes in their assessable income, a part of net income of tax, under the “untaxed part”. This particular advice is required to be provided by the due date of lodgement of family trust’s tax return[15].
There is also the advantage of capital gain tax as there is an applicability of 50% discount factor which is applied on capital gains for the assets which are retained for a period of more than one year. There are also the income tax advantages as there is an ability to select the person who would bear the net income of the year and to whom the same would be distributed every year[16]. In addition to these, the state income tax, the transfer tax and the federal estate taxes also have to be considered in a careful manner[17].
Asset protection is amongst the different advantages which are available to the family trust, as per which, the valuable assets are put beyond the reach of the possible creditors. By doing so, the family trusts are able to “save the day” time and again[18]. In majority of the cases, the assets are transferred to the family trust and this disallows the creditors from accessing them in case the transferor goes bankrupt or the transferor gets into some sort of financial difficulty[19]. The reason for this is that the transferor gets no interest in the property which has been transferred and also has no interest in the family trust which is recognized in the eyes of law. This feature is the reason why wealthy individuals opt to hold their assets in family trust[20]. In Dwyer v Ross[21], it was stated that the protection is raised as the trustee of the family trust is the owner of assets, instead of the beneficiaries. And as a result of this, the bankruptcy of the beneficiary would not impact upon the assets of the trustee.
Due to the very nature of trust, whereby the rich are benefitted, a political debate is brewing in the nation. As per the Australia Institute, in trusts, $3.1 trillion is being held and 51% of the revenue flows from them and goes to the richest 0.43% of the population. The debate has been raised as the family trusts allows the high income earners, to distribute the money to their family members on low tax rates and incomes and by doing so, they are able to reduce their personal liability of tax. The labour party has taken a position in this regard whereby they have made a promise to crack down on the family trusts in case they were elected and as a measure, they have promised to raise a value of $17 billion over a period of ten years[22]. Mr. Bill Shorten, the labour leader has made a promise to introduce an “across-the-board” minimum 30% tax for the family trust distributing funds to people over the age of 18 in case he comes to power[23].
Such promises were earlier proposed by the Coalition and were abandoned. The views have been changed and now the view of Coalition, as denoted by Scott Morrison, the treasurer is that the labour party’s $17 billion was a plan meant to shut down the family trust tax loopholes by directly assaulting the small business. And hence, coalition challenged the release of Bill Shorten to the full details of this policy. Even though a group of experts have suggested that the best manner of closing the loopholes is to attribute the income from trust to such individual who has control over it, irrespective of its final beneficiaries, this is not likely to be of use, owing to the complexities in accounting and legal structure which has taken centuries in its making and could take more than a single policy announcement, to be picked apart. There is thus, only a need of a single policy which does the purpose[24].
There are certain requirements which have to be kept in mind while setting up any trust. In the English case of Knight v Knight[25], three key certainties were given as the requirement for establishing a trust. These three were intention, subject matter and objects, which became embodied as the three key principles. These key certainties help in determining if the assets can be disposed off in the wills or whether the wordings are too ambiguous for allowing the beneficiaries for collecting what appears to be on face of the will as being “their”[26].
The first requirement is of the intention to create a trust. The intention of the settler is required for determining if a trust exists and also to determine the width of application and terms of such trust. As per the general maxim, the substance of the equity is looked at, instead of its form; in other terms, it could also be articulated as the equity looking into the intention, instead of the form. Hence, there is no requirement of a special formula or formal words, so long as it could be proved that there is a clear intent of creating the trust. There has to be an intention and it needs to be essential in terms that a trust would be formed and the creation would not merely be permissive. So, a real intention is needed and if there is no intention, a trust would not be created[27].
Where a dispute is raised regarding intention, the person who states that the trust was in existence is required to prove that the intention was present for creation of trust. The construction of language is looked into for this matter as a general approach. The language of the settler is looked into by the court and the words are given plain meaning, till the time a technical term is covered. And for purpose of taking out the meaning of a particular aspect, the entire document which led to the creation of trust has to be taken into consideration. The majority of trusts are in writing, particularly the ones which relates to land. In case of the trusts which are created through will, the context of this document has to be taken into consideration[28].
In Dean v Cole[29], the will of the testator left nearly all of the personal and real property to his wife through the use of wordings “…trusting to her that she will … divide in fair just and equal shares between my children” and that some sum of estate was at complete disposal of the widow. When the document was read as whole, the court interpreted that the testator did not have the intent of creating a trust as the trust for the entire property was not consistent with these statements as some parts were at widow’s disposal. Hence, “trusting to her” was not a binding trust to make equal divisions but to indicate the confidence in the wife. The intention is thus a state of mind and the relevant circumstances surrounding it. And when the trust is created through a trust instrument, the instrument has to be analysed for analysing the intention. Where there is uncertainty due to issues like mistake, fraud or duress, a trust would not be created.
The next requirement is for the certainty of the subject matter. There is a need for the trust to have a subject matter. A trust is regarding the property and in a valid trust, there has to be certainty regarding which property is the central matter of the trust as it becomes the subject matter of benefits and obligations. There is a need for the trustee to be able to identify the property, along with the rights of the beneficiaries in a fixed trust regarding the trust property. The amount or shares and the nature of property can give rise to the doubts[30].
With regards to the nature of property, any sort of ascertainable property could become the subject matter of trust, which includes tangible or intangible property, personal property, real property and the like. Though, an expectation cannot be deemed as trust property. In Re Rules Settlement[31], a woman was under the different objects of power of appointment which was held by other. She was of the opinion that she would get money from appointment and attempted to settle this money. The Collector of Imposts made an attempt to assess from the stamp duty, the settlement instrument based on the property being the subject of power of appointment. It was held by the Full Court of Victoria that the stamp duty was not payable as there was no property to settle, and just an expectancy of the same.
The quantum of interest is another crucial point when it comes to certainty of subject matter. Apart from determining the intent and type of property, it is important to know that there is a certainty of interest which is taken by the beneficiaries. And in absence of such certainty, the expression would be void. The key issue here is the interpretation with certainty by the court. In case, the settler had given certain criteria for interest calculation of beneficiaries, the court would use that particular criterion. This particular approach has to be applied in a fair and generous manner[32]. Re Golay[33] was a case in which a deposition on trust regarding the reasonable income was included in the will. And in this case, the court was of the opinion that this required an objective determination.
Certainty of the object is the last requirement where the general rule relates to “the beneficiary principle”. The principle here is that the trust has to favour the beneficiaries who are identified and who can be ascertained or for a recognized charitable purpose[34]. The principle given under Morice v Bishop of Durham[35] proves to be of help in this regard, which requires each trust to have a definitive object.
There are a number of cases which present different lessons with them. For instance, in the case of Rinehart v Welker[36], an agreement was attempted to be enforced by Gina Rinehart attempted to enforce the agreement, the effect of which was that her family would be able to arbitrate the disputes which related to the disputes regarding the trusteeship she her in the discretionary trust of the family. Some of the children tried to remove her from the post of trustee and also argued that this agreement was against the public policy since the jurisdiction of the court was outset regarding the trustees’ removal. Even though the Court of Appeal stated that the reason regarding drafting meant that the arbitration agreement could not be applied in this dispute, the majority held that such agreement could be given effect to. This case not only highlights that arbitration can be used in trusts to solve the disputes, but also that the terms of the trust drawing are crucial as these are referred to, in cases of disputes.
Another significant ruling, which turns one of the benefits of the trust into a disadvantage, was that of Harris v Harris[37]. In this case, the Full Family Court stated that the property of a discretionary family trust could be included for the purposes of the matrimonial assets of the separating spouses. This means that the attempt of the property of the trust to not be used by the spouse of the children upon separation would not always hold to be true[38]. The Richstar case, i.e., Richstar Enterprises Pty Ltd (ACN 099 071 968) v Carey (No 6)[39] is another important case when it comes to the family trusts. In this case, the Court used their powers regarding the discretionary trust property. And French J considered the degree of control which the beneficiary had over the trust and also explored the concept of the trust being the alter ego of the beneficiary[40].
Conclusion
The previous parts of this discussion highlighted the different aspects revolving around family trusts. The discussion highlighted the nuisances of trusts and the different reasons for which the trust form of business structure is selected by the people. Trust form of business structure helps in continuing the estate of the party even after their death. Particularly in the matter of family trusts, the individuals are able to transfer their property to trust, which is held by the family, thus their children get the assets, without having to make it their personal property and bear high taxes. The capital tax advantage available to the trusts further helps in reducing this tax liability. The income taxes are also reduced under family trusts as a trustee is selected who would bear the tax liability yearly. Instead of facing a risk of the will of the individual being disputed after their death, by opting for a trust form of business structure, they can continue their estate in perpetuity. The discussion also highlighted the other key advantage of the family trusts, which is asset protection, as by opting for this form of business structure, the assets of the beneficiary are protected from the creditors.
This discussion also highlighted some shortfalls and certain issues which can be raised under family trusts. The key one in this regard, which leads to the first recommendation is that when the trust is being created, the three key certainties, i.e., intention, subject matter and objects have to be properly embodied in the trust. Also, there is a need for the overhauling of the entire system of trusts, particularly owing to the political debate which has been highlighted in the previous segment. Hence, it is recommended to drawn up an effective policy, which helps in stopping the ones who are mis-utilizing this business structure for avoiding their tax liabilities. Another important recommendation is to enhance the asset protection through “Testamentary Trust”. The last key recommendation is that while the trust is being formed up, there is a need to properly cover every aspect which surrounds the family trust so as to draw up an effective which is not disputed later on, as was found regarding the arbitration clause regarding one of the case laws highlighted above. Till the times these recommendations are adopted, and possibly even after that, family trusts remains amongst the top choices when it comes to selection of a business structure, particularly for taxation benefits.
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