A trust of property is an obligation on the trustee to hold property or income for a particular purpose on behalf of other people. There are a number of different types of trusts:
Discretionary trusts
Unit trusts (public and private)
A combination of a unit and discretionary trust (hybrid)
Fixed trusts
Testamentary trusts
Inter vivos trusts.
Family trusts are typically discretionary trusts with family members as the beneficiaries. Discretionary trusts are so called because the trustee has discretion as to which beneficiaries he or she may pay income or capital. Income can usually be paid to one beneficiary at the exclusion of another. The potential pool of discretionary beneficiaries is usually set out in the trust deed.
The essential elements of a trust are:
A constituent document (the trust deed) although a trust can be created orally or implied
Trust property
Beneficiaries
Trustee
Settler
Obligations in relation to the trust property as set out in the trust deed.
For tax law purposes a trust is considered to be a separate legal entity although this is not the case in general law. In any event the trust is required to determine its net trust income and lodge an income tax return. If the trust has net distributable income, the income will generally be distributed to beneficiaries and is taxed in the beneficiaries’ respective tax returns at the marginal tax rates. Income retained by the trust is generally taxed at the top marginal rate plus Medicare levy.
The advantages and disadvantages of trusts vary depending on the type of trust it is. Generally speaking, the major disadvantage of a trust structure is that it cannot distribute losses to its beneficiaries. The major advantage, particularly in the case of a discretionary trust, is the ability to split income amongst the pool of beneficiaries. A benefit can be obtained by directing income to members of the family with low marginal income tax rates.
The trust loss regime is more severe than for companies. However if the discretionary trust elects to become a family trust this disadvantage can be eliminated. CGT exemptions available to the trustee can be passed on to beneficiaries. If the trust is structured correctly it will provide considerable asset protection against personal creditors.
Capital gains tax was introduced with effect from 20 September 1985. Capital losses cannot be offset against trading losses. They can only be offset against capital gains or if there are no corresponding capital gains then they can be carried forward indefinitely.
Expenses incurred in earning gross rental income, which are allowable deductions, include:
Costs of obtaining finance
Telephone, postage & stationery
Travel, rent collection and property inspection expenses
Agent management and letting fees
Insurance
Bank fees
Secretarial and bookkeeping fees
Interest on monies used to acquire property
Depreciation on furnishings, stoves, hot water system etc
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