Research Assignment 9: Family Trust, Equity & Trust Analysis

This report delves into the intricacies of family trusts, a crucial business structure in Australia. It begins with an introduction to trusts, defining their role in fiduciary relationships and their benefits like asset protection and tax advantages. The report then explores the rationale behind choosing family trusts, emphasizing their use in holding family assets and facilitating tax benefits. It provides a detailed analysis of the advantages and disadvantages of family trusts, including creditor protection, asset protection, and the potential loss of ownership. The report further examines the tax features and benefits associated with family trusts, such as income distribution and capital gains tax advantages. Asset protection features are also discussed, highlighting how family trusts safeguard assets from creditors. The report touches upon current political developments affecting family trusts and provides practical considerations for setting them up. Finally, it concludes with recommendations based on the analysis, offering valuable insights into the effective use of family trusts.

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Contents
1. Introduction..............................................................................................................................3
2. Why Family Trust?...................................................................................................................4
3. Advantages and Disadvantages................................................................................................5
4. Tax Features and benefit with family trust...............................................................................7
5. Asset protection features and benefit with family trust............................................................8
6. Current political developments affecting family trusts............................................................9
7. Things to consider while setting up family trusts...................................................................10
8. Case studies and lesson to be learnt.......................................................................................14
9. Conclusion and recommendation...........................................................................................15
10. Bibliography.......................................................................................................................17
10.1. Articles/ Books/ Reports.............................................................................................17
10.2. Cases............................................................................................................................17
10.3. Others..........................................................................................................................18

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1. Introduction
In Australia, there are different kinds of business structures which can be opted for pursuing the
business and one of these is trust1. A trust can be defined as a fiduciary relationship present in
which one is known as the settlor, who gives the other party, which is trustee, the right of
holding the title to assets or property for benefitting a third party, which is known as a
beneficiary. The debts of the company are the responsibility of the trustee. The trust form of
business structure is established for providing lawful safeguards to the assets of the settlor, for
making certain that these assets are distributed as per the wishes of settlors, to reduce paperwork
and save time, and in particularly instances, for avoiding or reducing the estate taxes of
inheritance2. The trust law was introduced back in 1970 by Malcolm EJ Morgan in the nation,
who was an accountant profession wise3. The Australian trust law follows the English trust law
and is amended through the commonwealth and State or Territory legislations.
The rationale for choosing the trust depends upon the numerous advantages which are available,
particularly in terms of tax benefits to the trust form of business structure4. However, this does
not mean that the trusts do not have any disadvantages; some of these disadvantages would be
discussed later on in this discussion. In the key characteristics of the trust is the requirement of
drawing up a formal trust deed in which is stated, the manner in which a particular trust would be
operated, its operations, the need for trustee to fulfil the administrative tasks in formal manner
1 Jason Mattock, Doing Business in Australia for China: How to Invest in Australia for Chinese (Australia China
Business Alliance, 2014)
2 Greg Rostron, What is a discretionary trust and what are the benefits? (2017)
<http://www.findlaw.com.au/articles/4606/what-is-a-discretionary-trust-and-what-are-the-ben.aspx >
3 Revolvy, Australian trust law (2017) <https://www.revolvy.com/main/index.php?s=Australian%20trust%20law>
4 Michael Janda, Trusts and tax minimisation explained (28 July 2017)
<http://www.abc.net.au/news/2017-07-28/trusts-and-tax-minimisation-explained/8752480 >

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and annually, and the expensive set-up of the trust. But the most important aspect, which pulls
people towards trust form of business structure, is asset protection. The rules for the trusts
depend upon the type of trust which one opts for. In Australia, there are a range of trusts which
includes unit trusts, managed investment trusts, special disability trusts, charitable trusts, and
family trusts5. In the following parts, a discussion has been carried on these different aspects of
trusts, where the focus is laid on the family trusts.
2. Why Family Trust?
A trust is deemed as a family trust when the trust’s trustee makes a “family trust election”. In
order to make this election, the trust has to be controlled completely by a “family group”. The
term family trust is used to refer to a discretionary trust which is set up for holding the assets of
the family or for conducting the business of the family6. In general, these are established for tax
purposes or for asset protection7. The Australian family trusts generally are established by the
member of the family to benefit the members of a family group. They could be the subject of
family trust election, through which different tax advantages are provided which is passed by the
trust through the family control test and the trust income is distributed between the beneficiaries
of the trust and these are the people within such family group8.
These trusts also assist in protecting the assets of the family groups from the liabilities of one, or
a higher number of family members, particularly in the events like insolvency or bankruptcy of
5 Australian Taxation Office, Specific rules for some trusts (2017) <https://www.ato.gov.au/general/trusts/specific-
rules-for-some-trusts/>
6 Philip de Haan and Aimee Riley, Discretionary trusts and asset protection (20 February 2017)
<http://www.wolterskluwercentral.com.au/tax/income-tax/discretionary-trusts-asset-protection/>
7 Andrew Mirams, Why You Should Set Up A Family Trust (16 January 2017) <https://propertyupdate.com.au/why-
you-should-set-up-a-family-trust/>
8 Clear Docs, Family Trusts explained and Family Trust Elections explained (2017)
<https://www.cleardocs.com/extra-family-trust.html>

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the family members. The family trusts provide a method through which, the assets of the family
are passed on to the future generations. Lastly, the family trusts provide a manner of accessing
such tax treatment which is favourable and which helps in making certain that all the family
members use the income tax as “tax free thresholds”. There are a number of other possible
benefits in the family trust mode, which includes the avoidance of issues like the challenges to
will upon the death of a family member.
3. Advantages and Disadvantages
There are a number of advantages in setting up a family trust. The first one in this regard is the
creditor protection. The assets which are held in trust, in general, are protected from the
beneficiaries’ creditors or that of the trustees in a personal manner. In majority of situations, a
trust protects the family from the liabilities of the parents, which are personally owed. Another
key advantage of family trust is protection against relationship property claims. At times when
the personal assets are given by a parent to their children, through a will, such assets may at
times become available to the partners of the children. Though, where the assets are owned by
the trust or are given to the trust upon the death of the parent, the children can continue to obtain
the benefits of such assets, and as these assets do not become a part of the personal property, they
cannot be subjected to the claims of the partner of the children9.
The property is also protected, both from and for the beneficiaries through family trust creation.
Where there is a concern regarding the ability of the children to manage their financial affairs
and a reluctance is caused to give the assets to the children upon death, best option is to set up a
family trust, which can be used by the children in a particular manner and which could in turn
9 Gibson Sheat, Family Trusts -Advantages and disadvantages (2017)
<http://www.gibsonsheat.com/Articles/Trusts/Family+Trusts+-Advantages+and+disadvantages.html>

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help in protecting the long term value of the assets of the family. Creation of family trust also
helps in protecting the assets of the family for future generation, particularly from the possible
changes in the tax law regime. The family trusts could provide the protection from different
kinds of taxes like the wealth tax, which could be introduced in future, or taxes like inheritance
tax or death duties. The will of a person can still be rewritten by the court where the court fees its
necessary; though, the same cannot be done for trusts. Also, the modern trust deeds allow for
right of variation so as to deal with the changes which are brought in the law. Lastly, the family
trusts are kept confidential due to them not being registered publically10.
Apart from these numerous advantages of creating a family trust one must not forget the
different disadvantages of opting for such mode of business structure. The first disadvantage is
the loss of ownership of assets. When the personal assets are transferred to trust, they become the
assets of the trust and the trust has complete control over such assets. Even though an ounce of
control can be retained as the power is held regarding the appointment and removal of trustees,
of by being trustees themselves, it is crucial to keep in mind that the transferred assets are not the
assets of the individual. And in case the person treats the assets as their own, the trust has the
option of challenging it as a sham11.
When a trust is formed, there is a need for time and costs to be allowed for meeting with the
yearly administrative and accounting requirements of the trusts. There are also high costs
involved when it comes to establishing a trust in terms of cost of formation and cost for transfer
of assets. These costs are also dependent upon the complexity of the trust, along with the nature
of the assets which are being transferred to the trust. There is also a need to keep in mind the
future changes in the law which could remove of cause effect to some of the key objectives of
10 Ibid
11 Ibid

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the formation of the trust. So apart from the immediate benefits which can be obtained by
forming a trust, there is a need to consider the long term effects of trust formation and the impact
of it to make a decision regarding if a trust form of business structure is advantageous or
disadvantageous as a business structure12.
4. Tax Features and benefit with family trust
A key advantage of the family trust is the trustee’s ability for selecting the person from whom
the net income of the trust would be distributed yearly. The net income of the trust can be
distributed between the beneficiaries in such a manner where the total income tax which is
payable on it could be minimized. For the tax purposes, a family trust is one where a valid family
trust election is made by the trustee and merely including the wordings family trust in the name
of the trust does not create a family trust. The valid family trust election is made by the trustee
only when they are satisfied regarding the relevant tests, as well as, have made an election in a
written manner and in an approved form. Upon this election being made, the same cannot be
revoked or varied save for in special situations13.
The Family Trust Election allows the trust to obtain certain tax concessions. The family trust
distribution tax, as a trade off, is imposed when the distributions are made out of the family
group. The family trust distribution tax is applicable to the distributions which are made from
the family trusts in case the trustee distributes capital or income, or confers a present entitlement,
makes a concessional loan or allows or provides otherwise regarding the usage of capital or
income of trust for less than the market value of it, to an entity or to a person which is out of the
12 Ibid
13 Australian Taxation Office, Family trusts – concessions (2017) <https://www.ato.gov.au/General/Trusts/In-
detail/Family-trusts---concessions/>

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family group of the trust. This tax is payable by the family trust’s trustee at the highest marginal
rate, in addition to the levy of Medicare14.
The Trustee beneficiary reporting rules are such rules which require the trustee to advise the
Australian Taxation Office, i.e., ATO regarding some specific details. These details are related to
each of the trustee beneficiary which is entitled to the part of a tax preferred amount of the
particular trust, or includes in their assessable income, a part of net income of tax, under the
“untaxed part”. This particular advice is required to be provided by the due date of lodgement of
family trust’s tax return15.
There is also the advantage of capital gain tax as there is an applicability of 50% discount factor
which is applied on capital gains for the assets which are retained for a period of more than one
year. There are also the income tax advantages as there is an ability to select the person who
would bear the net income of the year and to whom the same would be distributed every year16.
In addition to these, the state income tax, the transfer tax and the federal estate taxes also have to
be considered in a careful manner17.
5. Asset protection features and benefit with family trust
Asset protection is amongst the different advantages which are available to the family trust, as
per which, the valuable assets are put beyond the reach of the possible creditors. By doing so, the
family trusts are able to “save the day” time and again18. In majority of the cases, the assets are
14 Ibid
15 Ibid
16 The Dover Group, Chapter 05 – Family Trusts (2017) <https://www.dover.com.au/dover-way/part-19-legal-
entities-and-structures/chapter-05-family-trusts/>
17 Phil M. Fowler, Taxation of Family Trusts (2017) <http://thefinancebase.com/taxation-family-trusts-2820.html>
18 Joe Gardiner, Advantages and Disadvantages of Family Trusts (11 July 2016)
<https://www.linkedin.com/pulse/advantages-disadvantages-family-trusts-joe-gardiner>

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transferred to the family trust and this disallows the creditors from accessing them in case the
transferor goes bankrupt or the transferor gets into some sort of financial difficulty19. The reason
for this is that the transferor gets no interest in the property which has been transferred and also
has no interest in the family trust which is recognized in the eyes of law. This feature is the
reason why wealthy individuals opt to hold their assets in family trust20. In Dwyer v Ross21, it was
stated that the protection is raised as the trustee of the family trust is the owner of assets, instead
of the beneficiaries. And as a result of this, the bankruptcy of the beneficiary would not impact
upon the assets of the trustee.
6. Current political developments affecting family trusts
Due to the very nature of trust, whereby the rich are benefitted, a political debate is brewing in
the nation. As per the Australia Institute, in trusts, $3.1 trillion is being held and 51% of the
revenue flows from them and goes to the richest 0.43% of the population. The debate has been
raised as the family trusts allows the high income earners, to distribute the money to their family
members on low tax rates and incomes and by doing so, they are able to reduce their personal
liability of tax. The labour party has taken a position in this regard whereby they have made a
promise to crack down on the family trusts in case they were elected and as a measure, they have
promised to raise a value of $17 billion over a period of ten years22. Mr. Bill Shorten, the labour
19 Chan & Naylor, Asset Protection (2017) <https://www.chan-naylor.com.au/services/asset-protection/>
20 My Monet Calculator, Which Business Structure Provides The Greatest Asset Protection? (2017)
<http://www.mymoneycalculator.com.au/which-business-structure-provides-the-greatest-asset-protection>
21 (1992) 34 FCR 463
22 Leigh Sales, Labor promises to tackle the family trust tax problem (31 July 2017)
<http://www.abc.net.au/7.30/labor-promises-to-tackle-the-family-trust-tax/8761430>

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leader has made a promise to introduce an “across-the-board” minimum 30% tax for the family
trust distributing funds to people over the age of 18 in case he comes to power23.
Such promises were earlier proposed by the Coalition and were abandoned. The views have
been changed and now the view of Coalition, as denoted by Scott Morrison, the treasurer is that
the labour party’s $17 billion was a plan meant to shut down the family trust tax loopholes by
directly assaulting the small business. And hence, coalition challenged the release of Bill Shorten
to the full details of this policy. Even though a group of experts have suggested that the best
manner of closing the loopholes is to attribute the income from trust to such individual who has
control over it, irrespective of its final beneficiaries, this is not likely to be of use, owing to the
complexities in accounting and legal structure which has taken centuries in its making and could
take more than a single policy announcement, to be picked apart. There is thus, only a need of a
single policy which does the purpose24.
7. Things to consider while setting up family trusts
There are certain requirements which have to be kept in mind while setting up any trust. In the
English case of Knight v Knight25, three key certainties were given as the requirement for
establishing a trust. These three were intention, subject matter and objects, which became
embodied as the three key principles. These key certainties help in determining if the assets can
23 Adam Gartrell, Shorten's family trust tax plan a 'direct assault' on small business: Morrison (30 July 2017)
<http://www.smh.com.au/federal-politics/political-news/shortens-family-trust-tax-plan-a-direct-assault-on-small-
business-morrison-20170730-gxlky9>
24 Andrea Micheals, Tax debate: let's drop the rich vs poor rhetoric (14 August 2017)
<https://indaily.com.au/opinion/2017/08/14/tax-debate-lets-drop-rich-vs-poor-rhetoric/>
25 (1840) 49 ER 58

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be disposed off in the wills or whether the wordings are too ambiguous for allowing the
beneficiaries for collecting what appears to be on face of the will as being “their”26.
The first requirement is of the intention to create a trust. The intention of the settler is required
for determining if a trust exists and also to determine the width of application and terms of such
trust. As per the general maxim, the substance of the equity is looked at, instead of its form; in
other terms, it could also be articulated as the equity looking into the intention, instead of the
form. Hence, there is no requirement of a special formula or formal words, so long as it could be
proved that there is a clear intent of creating the trust. There has to be an intention and it needs to
be essential in terms that a trust would be formed and the creation would not merely be
permissive. So, a real intention is needed and if there is no intention, a trust would not be
created27.
Where a dispute is raised regarding intention, the person who states that the trust was in
existence is required to prove that the intention was present for creation of trust. The construction
of language is looked into for this matter as a general approach. The language of the settler is
looked into by the court and the words are given plain meaning, till the time a technical term is
covered. And for purpose of taking out the meaning of a particular aspect, the entire document
which led to the creation of trust has to be taken into consideration. The majority of trusts are in
writing, particularly the ones which relates to land. In case of the trusts which are created
through will, the context of this document has to be taken into consideration28.
26 Judith Bray, Key Cases: Equity & Trusts (Routledge, 2nd ed, 2013)
27 Iain McDonald and Anne Street, Equity and Trusts (Oxford University Press, 5th ed, 2016)
28 Mohamed Ramjohn, Text, Cases and Materials on Equity and Trusts (Routledge, 4th ed, 2008)

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In Dean v Cole29, the will of the testator left nearly all of the personal and real property to his
wife through the use of wordings “...trusting to her that she will ... divide in fair just and equal
shares between my children” and that some sum of estate was at complete disposal of the widow.
When the document was read as whole, the court interpreted that the testator did not have the
intent of creating a trust as the trust for the entire property was not consistent with these
statements as some parts were at widow’s disposal. Hence, “trusting to her” was not a binding
trust to make equal divisions but to indicate the confidence in the wife. The intention is thus a
state of mind and the relevant circumstances surrounding it. And when the trust is created
through a trust instrument, the instrument has to be analysed for analysing the intention. Where
there is uncertainty due to issues like mistake, fraud or duress, a trust would not be created.
The next requirement is for the certainty of the subject matter. There is a need for the trust to
have a subject matter. A trust is regarding the property and in a valid trust, there has to be
certainty regarding which property is the central matter of the trust as it becomes the subject
matter of benefits and obligations. There is a need for the trustee to be able to identify the
property, along with the rights of the beneficiaries in a fixed trust regarding the trust property.
The amount or shares and the nature of property can give rise to the doubts30.
With regards to the nature of property, any sort of ascertainable property could become the
subject matter of trust, which includes tangible or intangible property, personal property, real
property and the like. Though, an expectation cannot be deemed as trust property. In Re Rules
Settlement31, a woman was under the different objects of power of appointment which was held
by other. She was of the opinion that she would get money from appointment and attempted to
29 (1921) 30 CLR 1
30 At 26
31 [1915] VLR 670