Trusting in trusts: Why your trust deed needs to be reviewed

Discretionary trusts have been very popular for the holding of personal assets and carrying on family business. As useful tax planning tools, they provide good asset protection, together with flexibility in the distribution of income and capital.

Unfortunately this popularity and flexibility has resulted in changes to the taxation laws, and challenges by the Australian Taxation Office (ATO) of taxpayers’ interpretation of those laws. A recent example of this is the Bamford case which has had far reaching impacts on our interpretation of, and changes to, the law.

While these changes represent some challenges with discretionary trusts, they are still very useful tools, provided they are managed in a comprehensive, timely and consistent way. As we head towards another financial year end, it is timely to focus on trusts, and the new rules affecting them, to make sure that your trust deed is up to scratch and can do what you want it to do.

10 reasons why a review is important

In the same way that we regularly service our motor vehicles, and have regular health check ups with our doctor, making sure your Trust Deed is up to scratch is a simple matter of reviewing that it is up to date and will continue to do what you intend for it to do.

Here are 10 good reasons why a review of the trust including its deed would be of value:

1. To make sure the trust still exists

What is the vesting date of the trust? It is possible that the trust estate has come to an end without anyone realising it. This can have serious capital gains tax and stamp duty issues.

2. To ensure that the tax position has been optimised

By making sure that the trust has an appropriate definition of income and allows streaming. It is also necessary to ensure that trustee resolutions have been made at the appropriate times, otherwise the benefits of streaming (particularly dividends and capital gains) may be lost.

3. To ensure that any exposure to deemed dividends is minimised

By making sure that amounts distributed to beneficiaries are not automatically converted to loans and the trustee has the ability to create sub-trusts, deemed dividend exposures can be managed.

4. To ensure there are no future claims by beneficiaries against the trustee

By ensuring that the total amount distributed to beneficiaries in the accounts is consistent with the amount of the trust’s distributable income.

5. To ensure there is no liability to trust distributions tax

Where a family trust election has been made it is important to ensure that there are no distributions outside of the “family group”.

6. To ensure that the tax losses of the trust are available

There are a number of tests that need to be satisfied under the trust loss rules to ensure that the losses are deductible.

7. To ensure that the availability of the small business capital gains tax concessions is not compromised.

The way that income is distributed by the trustee can affect the availability of the small business CGT concessions even where the disposal takes place in a different year.

8. To ensure there has not been a resettlement of the trust

Any changes to the trust must only be made after considering the possibility of there being a trust resettlement. As with a vesting of the trust, this can result in serious capital gains tax and stamp duty issues.

9. To ensure that the franking credits attached to franked dividends are available to the beneficiary

Unless a family trust election has been made, it is possible that the franking credits attaching to franked dividends distributed though the trust will not be available to the beneficiary recipient.

10. To ensure that the liability of the trustee to claims from beneficiaries is managed

There have been many occasions where amounts distributed and owing to a beneficiary have been the subject of family dispute or claims from creditors of the beneficiary. It is important to ensure that the liabilities of the trustee to beneficiaries are understood and managed.

In addition to answering these questions, you can also take our short quiz on five key questions you should be asking about your trust deed.

One of BDO’s private clients partners can help you review your trust and tackle any issues.

Disclaimer: This content has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. This content cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained herein without obtaining specific professional advice.D

BDO Australia

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