Tuesday, October 30, 2018

Trust me I’m six – Trust Naming Conventions – Part VI **

Continuing on from recent posts about the types of trust deeds that can be created, this week's post summarises another five types of trusts:

Life Insurance Trust – this trust allows the owner of a life insurance policy to avoid being liable for tax on the proceeds of life insurance policies post death by setting up a trust to specifically own life insurance policies. All the rights of the life insured are assigned to the trustee, and on death, no tax should be payable on the proceeds of the life insurance policy.

Grantor Retained Income Trust – an irrevocable trust established in a written agreement whereby the grantor transfers specific assets to the trust, however retains the income from or the use of the assets for a stipulated period of time.

Grantor Retained Annuity Trust – a trust where the grantor gifts property to a trust and retains the right to a fixed annual payment for a certain period of time.

Negative Gearing Hybrid Trust
– this type of trust is based on the hybrid trust (profiled in an earlier post in this series). It incorporates aspects of a traditional unit trust that entitles unitholders to a fixed entitlement to income of the trust and also the aspect of the discretionary trust that allows the trustee to have a degree of control in the distribution of the capital of the trust to potential beneficiaries. The structure allows for both negative gearing tax deductions and asset protection for any capital gains derived.

Managed Investment Trust – these trusts are essentially unit trusts that carry on passive investment activities on a wide scale. When structured correctly, they can receive a concessional tax rate compared to investments in companies and other types of trusts.

Each of the above trusts is explored in View’s book – 40 Forms of Trusts – Workbook.

** For the trainspotters, ‘Touch Me I’m Sick’ is a song by Mudhoney from 1996.

Tuesday, October 23, 2018

Who is a beneficiary?

With thanks to the Television Education Network, today’s post considers the above mentioned topic in a vidcast.

As usual, an edited transcript of the presentation is below:

When we’re dealing with a discretionary trust, one of the first things we need to do is to identify who the beneficiaries are.

Is our client (or their spouse) in fact a beneficiary of the trust that we’re dealing with?

There are some common tricks and common issues that we should be keeping an eye out for, including ensuring we have identified all variations to the deed since establishment.

We also need to be aware of a case by the name of Yazbek, which outlines the approach that the courts take when they are asked to consider who the beneficiaries of a trust are.

Yazbek is significant because the court confirmed that a person who is eligible under a trust deed to receive income or capital from a trust is a beneficiary, notwithstanding that they may not have actually received anything from the trust at that point in time.

The Yazbek decision was handed down in the context of an assessment which had been issued to an individual beneficiary.

The ATO normally has a two-year period after that assessment was issued in which to issue an amended assessment (where they have identified some additional tax they believe should have been included in the taxpayer’s return).

However that standard two-year window is extended to four years where the individual involved is the beneficiary of a trust.

In Yazbek, ATO was trying to issue an amended assessment three years after the original assessment had been issued. So it was outside the two-year window, but within the four-year window.

The taxpayer in Yazbek hadn't received any distributions from the discretionary trust that the ATO contended he was a beneficiary of.

This was a discretionary trust which was controlled by other family members.

He was included in a wide class of discretionary beneficiaries, but had not actually received anything.

His contention was that in order to be a beneficiary of a trust, he needed to have actually received something from it.

Now the court was quite quick to shut that argument down and said that even if a person has not received any income or capital from the trust for the entire period it has existed, if they are within a class of persons who are eligible to receive income or capital at the trustee’s discretion, they are still a beneficiary of the trust.

Tuesday, October 16, 2018

Five to One – Trust Naming Conventions - Part V **

Continuing on from the last post about the types of trust deeds that can be created, this week's post summarises another five types of trusts:

Testamentary Trust
– these are simply trusts established pursuant to a will. The range of different types of testamentary trusts are almost limitless and can include fixed, unit, discretionary, hybrid, resulting (constructive), bare, lineal descendent and superannuation proceeds trusts. The various types of trusts have a number of different features and specific uses, however, fundamentally the legal structures of all testamentary trusts are very similar to any other form of trust established during the lifetime of a person (‘inter vivos’ trusts).

Post-death Testamentary Trust – a testamentary trust for the benefit of minor children that can be set up within three years of the testator’s death to access the excepted trust income tax concessions. Among other rules, the children must be ultimately entitled to the capital of the trust.

Superannuation Proceeds Trust – this trust is established solely to receive superannuation proceeds on the death of a fund member. A superannuation proceeds trust can be established by a will or by deed after the death of an individual.

Superannuation Fund – while referred to as a 'fund', superannuation entities in Australia are all largely founded on basic trust principles. The main distinguishing features of superannuation funds are that they potentially can last forever, unlike most other forms of trusts, unless established under South Australian law. There are also special tax concessions available for most superannuation funds.

SMSF Unit Trust – pursuant to provisions under the superannuation legislation, a superannuation fund can invest in a related unit trust. In some circumstances, the unit trust can in fact borrow money subject to certain rules. Broadly, among other requirements, the form of unit trust generally needs to satisfy the definition of a fixed trust for tax purposes.

Each of the above trusts is explored in View’s book – 40 Forms of Trusts – Workbook.

** For the trainspotters, ‘Five to One’ is a song by legendary band The Doors from 1968.

Tuesday, October 9, 2018

Stairway to (trust) heaven – Trust Naming Conventions – Part IV **

Continuing on from recent posts about the types of trust deeds that can be created, this week's post summarises another five types of trusts:

Protective Trust – this type of trust normally consists of two stages. Stage 1: A trust with a fixed income distribution to the principal beneficiary, until a 'termination event' occurs. The termination event can, for example, be the bankruptcy or death of the principal beneficiary. Stage 2: on the 'termination event, the fixed income distribution ends and the trustee instead holds the income to distribute, at its discretion, among a range of potential beneficiaries (normally the principal beneficiary (if living) and members of their family (if they have passed away).

Perpetuity Trust – this form of trust can, in Australia, only be established under South Australian law. While most western jurisdictions require trusts to end within a certain time period (normally a maximum of 80 years), South Australia has effectively abolished this rule and therefore trusts can potentially last indefinitely (i.e. in perpetuity).

Asset Protection Trust – this form of trust is normally established by an individual who is particularly concerned about potential asset protection risks, either from business, personal spousal relationships or family members. Often, the person gifts assets to the relevant trust which does not include the person as a potential beneficiary. The relevant person will also not have any control over the trust via roles such as trusteeship, principal or appointor.

Trust Partnership – primarily due to the flexibility created by the structure and the tax planning benefits, often a number of trusts will form a partnership to conduct business or investment activities. Invariably, while these trusts may individually be largely standard discretionary trusts, they will also often have an identical trustee and other specific control mechanisms.

Offshore Trust – While most western jurisdictions offer some form of trust, specific steps often need to be taken to establish any form of offshore trust and the exact way in which a trust operates will often be regulated by specific provisions in the relevant jurisdiction.

Each of the above trusts is explored in View’s book – 40 Forms of Trusts – Workbook.

** For the trainspotters, ‘Stairway to Heaven’ is a song by legendary band Led Zeppelin from their self titled album number IV in 1971. One of the greatest cover versions of the song, led by Ann and Nancy Wilson from Heart can be seen here (spoiler alert – Robert Plant begins crying at 4.32, as a choir and orchestra are revealed from behind drummer Jason Bonham, son of original Led Zeppelin drummer John).

Tuesday, October 2, 2018

Three (days) – Trust Naming Conventions – Part III

Continuing on from recent posts about the types of trust deeds that can be created, this week's post summarises another five types of trusts:

SPV Trust – an SPV trust will traditionally be a discretionary trust, however will be created so as to perform only one discrete activity. Examples include a particular property development project, a certain investment activity or to conduct a discrete part of a wider business, for example, employing staff, owning plant and equipment or undertaking borrowings with third parties.

Unit Trust – often seen as an ideal vehicle for investment activities between unrelated third parties in capital appreciating assets, unit trusts provide unitholders with fixed entitlements to income and capital, however are generally subject to CGT event E4.

Fixed Trust – the definition of a fixed trust for taxation purposes remains uncertain following the Colonial decision in 2011, which concluded that the meaning of a fixed trust is narrower than commonly thought by taxpayers and their advisers. However, generally, the test for qualifying as a fixed trust turns on whether the beneficiaries have a vested and indefeasible interest in the trust property.

Hybrid Trust
– a hybrid trust effectively blends particular characteristics of other forms of trusts into one arrangement. Most commonly, a unit trust is combined with a discretionary trust so as to give the ultimate owners a fixed entitlement to capital, and a discretionary entitlement to income. This structure is generally only used in tightly held groups or family investment activity.

Corporate Trust
– there are a range of trusts that can be referred to as a corporate trust. In particular, there are specific provisions under the tax legislation that treat particular forms of trusts (for example, public trading trusts) as companies for tax purposes. Subject to satisfying certain rules, it is also possible for trusts to form part of a tax consolidated group, and again, effectively be treated as if they are companies for tax purposes.

Each of the above trusts is explored in View’s book – 40 Forms of Trusts – Workbook.

** For the trainspotters, ‘Three days’ is a song by legendary/notorious band Janes Addiction from 1991.