A tried and true method of investment, trusts are generally and commonly known as being for the wealthier elements of society. A trust however is a highly versatile tool that individuals and businesses can use to align with and achieve their particular investment, financial or personal goals. They can also incur a number of taxable concessions, depending on the type of trust that has been established.
Trusts are a type of business structure that holds income, property or assets for the benefit of others (known as the beneficiaries of the trust). To establish a trust, a legal document called a trust deed is created to bestow upon the beneficiaries (be they a company, individual or a group) the power needed to deal with the trust’s contents.
In Australia, trusts are established as fiduciary relationships. This means that the two parties involved are bound legally and ethically to act in the best interests of the other, and particularly when acting on behalf of them. A trustee of a trust is responsible for managing the trust’s tax affairs, including registering the trust in the tax system, lodging trust tax returns, and paying some tax liabilities.
Some of the more common types of trust funds include unit trusts, managed investment trusts, family trusts, deceased estates, super funds, charitable trusts, family trusts, deceased estates, super funds, charitable trusts & special disability trusts.
Each type of trust has special tax rules mandated by the Australian Taxation Office.
Unit trusts are used in many commercial arrangements, including managed investment schemes. Units can often be bought and sold in a way similar to shares in a company. Some unit trusts are taxed like companies and their unit holders like shareholders.
Managed Investment Trusts
Managed investment trusts are a type of managed investment scheme, which had a new tax system come into effect in 2016. The new tax system was designed to reduce complexity and increase certainty for MITs and their investors.
Trusts that are qualified as family trust for the purposes of the trust loss provisions may benefit from concessional tax treatment. However, family trust distribution tax (FTDT) will apply to distributions made from these trusts if the trustee confers a present entitlement or distributes income or capital, makes concessional loans or otherwise provides or allows the use of income or capital of the trust for less than its market value to a person or entity that is outside of the trust’s family group. FDTD is payable by the trustee of the family trust at the highest marginal rate plus the Medicare levy. Beneficiaries that receive distributions on which FTDT was paid receive the distribution as non-assessable non-exempt income (against which they can’t deduct expenses).
A deceased estate is technically not a trust while it is being administered, but is treated as a trust for tax purposes, with the executor or administrator of the estate taken to be the trustee
Self-managed super funds, in essence, are trusts, with trustees and beneficiaries (members) of the funds. However, these super funds are taxed differently from other types of trusts.
The income of an SMSF is generally taxed at a concessional rate of 15%, but the fund needs to be a complying fund that follows the laws and rules for SMSFs to be entitled to that rate. If they are a non-complying SMSF, they could be taxed at 47% instead. The certain assessable contributions that can comprise an SMSF fund include:
- Employer contributions
- Personal contributions that a member has notified as being intended to be claimed as a tax deduction
- Generally, any contribution made by anybody other than the member, with limited exceptions such as spouse contributions and government co-contribution.
Some types of charitable funds must be established as trusts in order to qualify for charity tax concessions.
Special Disability Trusts
Immediate family members and carers can set up a special disability trust to provide for the future care and accommodation needs of a person with a severe disability. The trustee is taxed at individual marginal rates.
For more information about trusts and taxable concessions, speak with us.