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*There are so many things you should know about trusts. But this article about family trusts looks mostly at Australian law, covering some of the basics that folks should be aware of. Arguably, a very important aspect of trusts as the latter are legal structures first and foremost.
The Legal Framework in Australia for Family Trusts
Family trusts can be complicated – legally
Their use is governed by a complex legal framework that varies across states and territories. This article provides a ‘hi-level’ overview of the legal framework governing discretionary and family trusts in Australia. We even cast a glance at the relevant legislation, regulatory requirements, and fiduciary duties. (Keep reading if you don’t know what those terms mean – and you will)
- Trust Law in Australia
Trust law in Australia is a combination of statutory law and common law principles. Each state and territory has its own legislation governing trusts, which outlines the powers and duties of trustees, the rights of beneficiaries, and the procedures for trust administration. Here’s some of it:
Key Legislation
- Trustee Act 1925 (NSW)
- Trustee Act 1958 (Vic)
- Trusts Act 1973 (Qld)
- Trustee Act 1898 (Tas)
- Trusts Act 1973 (SA)
- Trustee Act 1962 (WA)
- Trustee Act 1978 (NT)
These acts provide the legal framework for the creation, administration, and termination of trusts in their respective jurisdictions. No need to read them yourself – that’s the job of your lawyer. As McGregor states, “The trust legislation across Australian states and territories establishes the fundamental principles and procedures for trust administration” (McGregor 45).
2. Establishing a Discretionary Trust
The establishment of a discretionary trust involves several key steps. This includes the drafting of the trust deed (most times, most people use lawyers who usually quickly edit their template to customise it) , the appointment of trustees, and the transfer of assets into the trust.
Trust Deed
The trust deed is the document that outlines the terms and conditions of the trust. It must comply with relevant laws and include:
- Identification of the Settlor, Trustee, and Beneficiaries: The deed must clearly identify all parties involved in the trust.
- Trustee Powers and Duties: The deed should specify the powers and responsibilities of the trustee, including their discretion to distribute income and capital.
- Distribution Guidelines: While the trustee has discretion, the deed can provide guidelines or objectives for distributions.
- Amendment and Termination Provisions: Procedures for amending the trust deed and terminating the trust should be outlined.
Appointment of Trustees
The settlor appoints the trustee(s), who are responsible for managing the trust in accordance with the trust deed and relevant laws. Trustees can be individuals or professional entities, each with its own advantages and considerations. Actually, once you have read this article, you should be able to navigate a trust deed with greater ease – extra bonus!
- Trustee Duties and Responsibilities
Trustees of discretionary trusts have significant fiduciary duties and responsibilities under Australian law. These include:
Fiduciary Duty
Trustees must act in the best interests of the beneficiaries, exercising their powers with care, diligence, and impartiality. They must avoid conflicts of interest and act honestly and in good faith.
Duty of Care
Trustees are required to manage the trust’s assets prudently, making informed decisions about investments and distributions. According to Heenan, “Trustees must exercise a high standard of care in managing trust assets, reflecting their fiduciary obligations” (Heenan 112).
Duty of Loyalty
Trustees must prioritize the interests of the beneficiaries over their own interests. They cannot profit from their position as trustees unless explicitly allowed by the trust deed.
Duty to Keep Accounts
Trustees must maintain accurate records of the trust’s transactions, including income, expenses, and distributions. Proper record-keeping is essential for trust administration and compliance.
- Beneficiary Rights
Beneficiaries of discretionary trusts have specific rights under Australian law, including:
Right to Information
Beneficiaries are entitled to information about the trust’s administration, including financial statements and details of distributions. This transparency helps beneficiaries understand their potential entitlements and the management of the trust’s assets.
Right to Fair and Equitable Treatment
While beneficiaries do not have fixed entitlements to the trust’s assets, they have the right to expect fair and equitable treatment from the trustee. Trustees must make distributions in accordance with the trust deed and in the best interests of the beneficiaries.
According to Jacobs, “Beneficiaries’ rights to information and equitable treatment are fundamental aspects of trust law, ensuring transparency and accountability” (Jacobs 89).
- Regulatory Compliance
Discretionary trusts must comply with various regulatory requirements, including tax obligations and state-specific trust laws.
Tax Obligations
Trusts are subject to Australian taxation laws, and trustees must ensure compliance with tax reporting and payment requirements. Key tax considerations include:
- Income Tax: Trust income is generally taxed at the beneficiaries’ marginal tax rates. Trustees must lodge annual tax returns and provide distribution statements to beneficiaries.
- Capital Gains Tax (CGT): Trusts are subject to CGT on the disposal of assets. Certain trusts may be eligible for CGT concessions (if you are working with the right accountant!)
- Goods and Services Tax (GST): Trusts engaged in commercial activities may need to register for GST and comply with GST reporting requirements.
According to Sadiq, “Effective management of trust tax obligations requires a thorough understanding of the relevant tax laws and diligent compliance” (Sadiq 132).
State-Specific Regulations
Trusts must also comply with state-specific regulations, including:
- Stamp Duty: The transfer of property into or out of a trust may attract stamp duty, depending on the jurisdiction. Always keep the receipt for this.
- Land Tax: Trusts holding real property may be subject to land tax, with rates and exemptions varying by state.
- Trustee Duties: State laws govern the powers and responsibilities of trustees, and trustees must ensure compliance with these laws.
- Trust Administration
Effective trust administration involves ongoing management of the trust’s assets, compliance with legal and tax obligations, and regular communication with beneficiaries.
Record Keeping
Trustees must maintain comprehensive records of all trust transactions, including income, expenses, and distributions. These records are essential for tax reporting, compliance, and transparency.
Reporting
Trustees must provide regular reports to beneficiaries, detailing the trust’s financial performance and distributions. These reports help beneficiaries understand their potential entitlements and the management of the trust’s assets.
Investment Management
Trustees are responsible for managing the trust’s investments prudently, making informed decisions to protect and grow the trust’s assets. This may involve working with financial advisors or investment managers to develop and implement an investment strategy.
- Legal Disputes and Resolution
Disputes can arise in discretionary trusts, particularly regarding trustee decisions and beneficiary entitlements. It is important to have mechanisms in place to resolve disputes effectively.
Common Disputes
- Trustee Decisions: Beneficiaries may challenge the trustee’s decisions regarding distributions or investment management.
- Beneficiary Entitlements: Disputes may arise over the fair and equitable treatment of beneficiaries.
Dispute Resolution Mechanisms
- Mediation: Mediation can help resolve disputes amicably, with a neutral third party facilitating discussions between the parties.
- Arbitration: Arbitration is a more formal process, where an arbitrator hears evidence and makes a binding decision.
- Court Proceedings: As a last resort, disputes may be resolved through court proceedings. Trustees and beneficiaries should seek legal advice to navigate the complexities of trust litigation.
According to Donovan, “Effective dispute resolution mechanisms are essential for maintaining trust integrity and ensuring fair treatment of all parties” (Donovan 154).
Conclusion
The legal framework governing discretionary trusts in Australia is complex. It is made up of lots of elements, including statutory law, common law principles, and regulatory requirements. Trustees, settlors, and beneficiaries must navigate this framework to ensure the effective establishment, administration, and compliance of discretionary trusts. By understanding the relevant legislation (tax too) trust parties can optimize the benefits of discretionary trusts while ensuring legal and tax compliance. Trusts are specially handy with property investments and are quite common there. The latter comes with its own legal complexities. But with proper planning and professional advice, discretionary trusts can provide robust solutions for managing and protecting assets in Australia. Need advice? Contact us here & either we’ll help you or put you in touch with the right professionals.
Bibliography
Donovan, Richard. Australian Trust Law: A Comprehensive Guide. 2nd ed., Federation Press, 2018.
Ford, H.A.J., and Lee, W.A. Principles of the Law of Trusts. 4th ed., Thomson Reuters, 2017.
Heenan, Denis. Trusts and Fiduciary Duties in Australia. LexisNexis Butterworths, 2016.
Jacobs, B., and Battersby, G. Trusts in Modern Practice. 3rd ed., Thomson Reuters, 2019.
McGregor, Helen. Understanding Trust Law in Australia. Oxford University Press, 2015.
Sadiq, Kerrie. Australian Taxation Law. 30th ed., CCH Australia Limited, 2020.