Applied taxation of trusts

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3 Contents Learning objectives The basic features of a trust How a trust is established Case study: Andrew and Patricia Reeves Background Case study Analysis What types of trusts can be used? Case study: Bob Background Case study Analysis Why is the trust deed so important? Case study: Harris Unit Trust Background Case study Analysis Personal liability of directors Case study: The landlord Background Case study Analysis Taxation of trust income How is a trust s taxable income calculated? Case study: Darcy Trust Background Case study Analysis When will a beneficiary be presently entitled to a share of trust income? Case study: Williamson Discretionary Trust Background Case study Analysis How do you ensure that a beneficiary pays tax instead of the trustee? Case study: Cheng Family Trust Background Case study Analysis How does a trustee make a beneficiary specifically entitled to a capital gain or franked distribution? Case study: Sellers Discretionary Trust Background Case study Analysis How to ensure that double taxation does not apply under Division 6 where a beneficiary has been made specifically entitled to a capital gain and/or franked distribution Case study: Richardson Family Trust Background Case study Analysis What special tax rates apply to particular types of beneficiaries? Case study: Vague Discretionary Trust Background Case study Analysis Corporate beneficiaries When will an unpaid present entitlement (UPE) owed to a private company beneficiary be regarded as a deemed dividend? Case study: Alex Background Case study Analysis Small business concessions significant individual Case study: Steven Background Case study Analysis Small business concessions dilution of benefit Case study: Trevor and Suzanne Background...62

4 3.3.2 Case study Analysis Asset protection Case study: Mary Background Case study Analysis Family trust elections Discretionary trust with losses Case study: Carravis Family Trust Background Case study Analysis Unit trust with losses, and the need to make an election Case study: Heather and Philip Background Case study Analysis Trust owning shares in company with losses Case study: Thomas Family Trust Background Case study Analysis Family group and family trust distributions tax Case study: Joanne s Family Trust Background Case study Analysis Completion of loss schedule Case study: A discretionary trust Background Case study Analysis day rule and need to make election Case study: Solomon Family Trust Background Case study Analysis Trustee beneficiary reporting rules Case study: The Day Trust Background Case study Analysis Extension of TFN reporting and withholding rules to closely held trusts Case study Background Case study Analysis Capital gains tax CGT event E1 Creating a trust over a CGT asset Case study: Fred Background Case study Analysis CGT event E2 Transferring an asset to an existing trust Case study: Smith Family Trust Background Case study Analysis CGT event E3 Converting a trust to a unit trust Case study: Braddock Trust Background Case study Analysis CGT event E4 Capital payment for trust interest Case study: Sellers Unit Trust Background Case study Analysis CGT event E5 Beneficiary becomes entitled to trust asset Case study: Rod, Claire and Jackie Background Case study Analysis CGT event E6 Disposal to beneficiary to end income right Case study: Richardson Family Trust Background

5 5.6.2 Case study Analysis CGT event E7 Disposal to beneficiary to end capital interest Case study: Keaton Family Trust Background Case study Analysis CGT event E8 Disposal by beneficiary of capital interest Case study: Hopkins trading Trust Background Case study Analysis CGT event E9 Creating a trust over future property Case study: Jeremy Smith Background Case study Analysis Access to CGT general discount by a trust Case study: Countable Discretionary Trust Background Case study Analysis The small business concessions Unit trust Case study: Cleverly Constructed Unit Trust Background Case study Analysis The small business concessions Partnership of discretionary trusts Case study: Travem and Fogam Family Trusts Background Case study Analysis Testamentary trusts Issues to consider in creating a testamentary trust Case study: John Background Case study Analysis Income tax advantages of testamentary trusts Case study: Nick Background Case study Analysis Trustee can determine who is assessed on a capital gain Case study: Elizabeth and the Salvation Army Background Case study Analysis Resettlements Adding beneficiaries Case study: Glenda and Eric Smith Background Case study Analysis Nominating new beneficiaries Case study: Glenda and Eric Smith (2) Background Case study Analysis Nominating a new unrelated beneficiary Case study: Glenda and Eric Smith (3) Background Case study Analysis Issuing new units Case study: Brown Unit Trust Background Case study Analysis Addition of discretionary income right to fixed trust Case study: Vanilla Unit Trust Background Case study Analysis Change to unit trust distributable income for AIFRS purposes Case study: Harrison Unit Trust Background...137

6 7.6.2 Case study Analysis Extension of term of trust no specific purpose to term Case study: Georges Family Trust Background Case study Analysis Extension of term of trust special purpose to term Case study: Merrick Trust Background Case study Analysis Amending the term of a unit trust subject to AIFRS Case study: Guinness Unit Trust Background Case study Analysis Addition of property to trust Case study: Terminal Discretionary Trust Background Case study Analysis Change of trustee Case study: Gerard Family Trust Background Case study Analysis Procedural or administrative changes Case study: Various Discretionary Trust Background Case study Analysis Adding power to accumulate as well as redefining income Case study: Various Discretionary Trust (2) Background Case study Analysis Refinancing Repaying borrowed funds Case study: Hemmingway Unit Trust Background Case study Analysis Deceased estate and payment to satisfy obligation Case study: Hayden Background Case study Analysis Unit trust refunding capital, refinancing unpaid present entitlement Case study: George, Sally and Mark Background Case study Analysis Repayment of amount of unpaid present entitlement converted to loan Case study: Friendly Discretionary Trust Background Case study Analysis Unrealised gains Case study: Blue Discretionary Trust Background Case study Analysis Family trust and money used for other than income producing purposes Case study: Gold Family Trust Background Case study Analysis Non-fixed trust apportionment of interest expense Case study: Cobalt Trust Background Case study Analysis...153

7 Learning objectives At the end of this program, you should be able to: LEARNING OBJECTIVES Identify the reasons why trusts are used as business and investment vehicles. Understand how trusts are taxed and when trustees or beneficiaries will be assessed on net taxable income derived by the trust including related planning opportunities in strategically streaming capital gains and franked distributions to certain beneficiaries. Recognise the issues that can arise for a trust where it uses a corporate beneficiary including how unpaid present entitlements received by private company beneficiaries can be structured to prevent a deemed dividend arising under Division 7A. Recognise when a family trust election needs to be made and the impact it will have on the trust. Identify when each specific CGT event may apply, and understand the planning opportunities available which can allow a trust to leverage the CGT general discount and CGT small business concessions. Identify the income tax and CGT advantages of using a testamentary trust. Recognise when specialist advice will be needed to determine whether a resettlement has occurred, and what the impact of a resettlement might be. Determine when an interest deduction can be claimed by a trustee on funds borrowed to finance a payment to a beneficiary. CPA Australia Ltd

8 1. The basic features of a trust Trusts are a commonly used business and investment structure in Australia. Prior to discussing the key issues arising from the tax treatment of trusts it is, however, prudent to revisit trust law principles to understand the basic features of a trust. Accordingly, this topic discusses the following fundamental elements that should be considered in setting up a trust structure: The steps required to establish a trust including the various roles played by key stakeholders including settlors, appointors, trustees and beneficiaries. The various types of trusts that can be created and the different tax planning implications that arise if a discretionary or fixed trust is used. The key issues that should be addressed in any trust deed executed on the creation of a trust. The circumstances in which the directors of a corporate trustee will be personally liable for an action by creditors. 1.1 How a trust is established Case study: Andrew and Patricia Reeves Background Case study: Andrew and Patricia Reeves Andrew and Patricia Reeves approach you as their accountant to recommend an investment structure for them. They have been married for 10 years and have one child aged 11 who is at school. They currently have some $200,000 in a bank account (in joint names) that they have been paying personal tax on. Currently Andrew is a house husband, and Patricia works as an advertising executive and earns approximately $130,000 per annum. Patricia is about to be appointed a director in the company that she works for. They have had friends tell them that they should be using a family trust and they want to understand how one is set up Case study Analysis Relevant principles The term trust is not defined under either section 6(1) of the Income Tax Assessment Act 1936 (ITAA36) or section 995-(1) of the Income Tax Assessment Act 1997 (ITAA97). Instead, its meaning is determined according to common law and equitable principles. Applying these principles, a trust is not a separate legal entity; rather, it should be characterised as a documented relationship, subject to trust law. 2 CPA Australia Ltd 2011

9 The document is the trust deed and the relationship exists between the person(s) who created the trust by giving the trust property, the person(s) who legally operate(s) the trust property and person(s) who may equitably benefit from the trust by receiving income and/or capital distributions. Accordingly, it is a key feature of a trust that there is a distinction between the legal ownership of property which is held by a trustee and equitable ownership of property which will be held by a beneficiary. There are two main ways that a trust deed can be established other than by the creation of a testamentary trust (this is discussed in more detail in Chapter 6). The whole process can be managed by a lawyer, or you can purchase a standard trust deed and instruct a lawyer or a shelf company firm to modify it to suit your needs. The actual mechanics of setting up a trust are reasonably simple: Decide what type of trust will be established (e.g. discretionary or fixed trust). Decide who will be the beneficiaries. Decide who will be the settlor (if a discretionary trust or, in some cases, a unit trust). Decide whether there will be an appointor and, if so, who it will be. Decide who will be the trustee. Have the deed drafted. Have the settlor give the settled sum to the trustee or have the unit holders subscribe for their units. Have the deed executed. Have the deed stamped (if necessary). If a corporate trustee is to be used, incorporating the trustee company can be added to the list. Both advisers and clients should carefully review the clauses of the trust deed as those terms potentially affect every transaction that the trustee engages in on behalf of the beneficiaries. This has become particularly critical following the High Court decision in Commissioner of Taxation v Bamford; Bamford v Commissioner of Taxation [2010] HCA 10 where it was held that the phrase income of the trust estate takes its meaning under trust law rather than the taxation law. Accordingly, where the trust deed defines the term income that will in practice be the definition that will be applied in determining how beneficiaries (and/or trustees) are taxed on net taxable income under Division 6 of the ITAA36. As discussed below, it is essential that each trust deed now be closely reviewed to determine whether the term income of the trust estate has been defined under the trust deed, and if so the terms of the specific definition of income that has been adopted under that deed. In addition, it should be noted that there is a broad array of different definitions of income in trust deeds which have been progressively prepared over time which may have varying tax impacts in terms of the way in which beneficiaries (or trustees) are assessed on trust net taxable income. CPA Australia Ltd

10 Furthermore, it is also essential that a trust deed contain a clause allowing a trustee of a discretionary trust to stream capital gains and franked distributions on or after 1 July 2010 if that trustee wishes to differentially stream such gains and dividends to beneficiaries. These issues are dealt with more extensively below, especially in Chapter 2 concerning the taxation of trust income which discusses, amongst other things, recently enacted provisions concerning the streaming of capital gains and franked distributions by trustees of discretionary trusts. In setting up a trust it is also crucially important that you understand the roles that are played by the settlor, the appointor, the trustee and the beneficiaries as detailed below. The settlor The settlor of a trust is the person who establishes the trust. A trust is normally established by the settlor giving property, such as money, to be held on trust for the beneficiaries. The property should be freely given with the intent that it be held for the benefit of the beneficiaries. The property should also be valuable, with $100 and upwards generally being seen as a reasonable amount. A settlor cannot benefit from a trust that they establish, and if for some reason they do, the trust can be void. This means that a settlor should not be a beneficiary of the trust. If the settlor is reimbursed for the gift they make, perhaps by an accountant being the settlor and billing their client for the gift, the Courts can consider that the client is the real settlor. This means that if the trust was established for the client, it can be void. It will be acceptable for a tax adviser, accountant or lawyer to charge a fee in connection with the establishment of a trust. TAX TRAP What will not be acceptable is to have a line on the bill such as: Disbursement settled sum $100. A settlor will exist for every discretionary trust, but is not typically required for a unit trust, where the initial sum subscribed by the unit holders can form the basis for the establishment of the trust. The appointor A trust may include someone in the role of an appointor. An appointor has the power to appoint and remove a trustee. An appointor can be one person acting individually, or more than one person acting jointly. Being an appointor, if you are also a beneficiary, is quite a position of power as you have ultimate control over the trustee, who in turn controls who benefits from the trust, and how the trust is operated. For this reason, care should be taken when selecting an appointor. Moreover, the trust deed should expressly include a provision to ensure that there is a mechanism for the replacement of an appointor should the appointor die or wish to stand down from the role. Having an appointor also has potential advantages from an asset protection viewpoint. 4 CPA Australia Ltd 2011

11 In the past, the power to appoint a trustee has been used to prevent assets from being accessible in the case of a property settlement in the Family Court (see Ascot Investments Pty Ltd v. Harper [1981] HCA 1 where the High Court determined that the Family Court had no jurisdiction over persons who were not party to a marriage.) This case led to planning opportunities where more than one person would act in the role of appointor, for instance a wife and her friend, with any decision to appoint or remove a trustee having to be made jointly. If the marriage was breaking down, the wife and her friend could then jointly agree to appoint the friend as the trustee. When the property settlement between husband and wife came before the Family Court to be finalised, the Court would be unable to direct the friend to distribute the trust s assets as trustee in accordance with its instructions, as the friend is not a party to the marriage. In addition, although the Family Court could direct the wife to vote to make herself trustee, she had only one vote and could not affect who was the trustee without her friend s consent as appointor. As a result of changes to the Family Law Act (1975) in December 2004, and particularly the addition of section 90AE to that Act, it is now likely that the Family Court will have the power to direct how third parties should act in such circumstances. Section 90AE(2) empowers the Court to make an order that: (a) directs a third party to do a thing in relation to the property of a party to the marriage; or (b) alters the rights, liabilities or property interests of a third party in relation to the marriage. The Court can, however, only make such an order under subsections 90AE(3) and 90AE(4) if: making the order is reasonably necessary, or reasonably appropriate and adapted, in the circumstances of the settlement the third party has been accorded procedural fairness in all the circumstances, it is just and equitable to make the order and the Court has taken into account: the taxation effect (if any) of the order on the parties to the marriage and on the third party the social security effect (if any) of the order on the parties to the marriage the administrative costs of the third party in relation to the order the economic, legal or other capacity of the third party to comply with the order any other matters raised by the third party and any other matter that the Court considers relevant. You should consider seeking professional legal advice over issues involving what may or may not work in the case of a Family Court action. WARNING The limitations of using a discretionary trust to shelter property on a matrimonial dispute was also recently considered in the High Court case of Spry v Kennon [2008] HCA 56. CPA Australia Ltd

12 In this case a wife contended that certain assets held in discretionary trusts should be included in the pool of assets which should have been divided equally between the spouses on a matrimonial settlement as those interests held by the spouses were property of the marriage. Broadly, it was held that a discretionary beneficiary s right to due administration of the trust and the right to be considered as an object (i.e. potential beneficiary) of the trust, and the trustee s power to apply the income or assets of the trust, were property of the marriage (even though it may be difficult to put a value on such rights). Accordingly, the total value of the trust assets was included in the pool of property divided between the spouses. A subsequent decision of the Full Court of the Family Court held that the wife in this case could enforce such a judgment for the payment of the outstanding balance of her share of the property of the marriage (see Stephens v Stephens [2009] FamCAFC 240 which used the pseudonym of Stephens in lieu of Spry to provide some level of confidentiality to the proceedings). This latter decision illustrates the Family Court s acceptance to consider a spouse s interest as a discretionary object of a trust as being property of the parties to the marriage. Whilst Spry s case may be distinguished on its own facts it suggests that a court may be prepared to look behind a discretionary trust to attribute particular trust property to particular beneficiaries on a matrimonial dispute. Many business owners in the SME sector have also used discretionary trusts as an assets protection vehicle in case of bankruptcy. However, in the same way that the Family Court might now be able to direct parties to a marriage as to how to deal with trust assets if they are the trustees or have the power to appoint the trustee, the same might occur if a bankrupt were in the position to determine who is the trustee of a trust. This would occur if the bankrupt were the appointor of the trust and the appointor power passed to their trustee in bankruptcy. In general, the Federal Court takes the view that the power of appointment of a trustee of a trust cannot be exercised by the trustee in bankruptcy, or that if the trustee in bankruptcy did exercise the power and then direct value in the trust to be distributed to themselves for the benefit of their creditors, they would be acting in breach of trust. While this is the prevailing view, it would be worthwhile having a clause in the trust deed that stops someone having the power of appointment if they become bankrupt, or alternatively using joint appointors as noted above. WARNING The strategy of using a trust to provide for asset protection in the case of bankruptcy is a contentious issue. You should review the current position for trusts and bankruptcy prior to providing advice on this issue. Further information can be obtained from the website of the Insolvency and Trustee Service Australia at < or the Attorney General s website at < 6 CPA Australia Ltd 2011

13 WARNING A Federal Court decision in one of the Richstar cases 1 adds further doubt to the level of asset protection provided by a discretionary trust in recovery proceedings. This case concerned an application by the Australian Securities and Investments Commission (ASIC) to have a receiver appointed to recover assets held in the defendant s discretionary trust on the basis that their contingent interests in such property constituted property under the Corporations Act (2001). French J held that the trust in issue was controlled by a trustee which was the alter ego of the defendant beneficiaries because it was as good as certain that those beneficiaries would receive the benefits of the trust as they effectively controlled the trustee. Whilst the scope of the Richstar case may be confined to a trust which may be subject to certain actions brought by ASIC under the Corporations Act (2001), it nonetheless was a departure from long standing trust law that a potential beneficiary does not have an interest in trust property. TAX TRAP If one of your purposes in transferring an asset to a trust is to put it out of reach of creditors you should consider the provisions of sections 120 and 121 of the Bankruptcy Act (1966). Broadly, section 120 provides that a transfer of property by a person who later becomes bankrupt may become void against the trustee in bankruptcy if it takes place 5 years before the commencement of bankruptcy and the transfer occurred for less than market value. A lesser period may apply where it can be established that the transferor was solvent at the time of transfer. Under section 121 a transfer will also be void against the trustee in bankruptcy where the property would have been otherwise available to creditors, and the main purpose of the transfer was to prevent it being divided amongst the transferor s creditors. The trustee The trustee of a trust can be a natural person, more than one person, or a company. A trustee can be a beneficiary of a trust provided they are not the sole beneficiary (see DKLR Holdings Co (No.2) Pty Ltd v Commissioner of Stamp Duties (NSW) (1982) 149 CLR 431). The trustee is responsible for the day-to-day management of the trust, and their obligations and powers are outlined in the trust deed. Most trust deeds would give a trustee the power to deal with the property of the trust, make investments and carry on a business. However, to the extent the trustee acts outside the powers and restrictions set out in the trust deed, those actions can be rescinded and the trustee may be personally liable for any loss. Where this occurs, the trustee will be acting ultra vires and in breach of the trust. Thus, a trustee should take care to ensure that any action they undertake is permitted under the trust deed. Conversely, a trustee is not generally liable for actions that they take on behalf of the trust which are allowed under the trust deed. In these circumstances the trustee can be indemnified out of the assets of the trust if they are acting within the terms of the trust. As a corollary, if a trustee incurs a liability greater than the trust has the ability to pay, the trustee must fund the shortfall. 1 Australian Securities and Investments Commission in the matter of Richstar Enterprises Pty Limited (No. 6) [2006] FCA 814. CPA Australia Ltd

14 In these circumstances the trustee can be indemnified out of the assets of the trust if they are acting within the terms of the trust provided there is an indemnity clause included in the trust deed. As a corollary, if a trustee incurs a liability greater than the trust has the ability to pay, the trustee must fund the shortfall from its own funds. It is this liability issue that often leads to a company being appointed as the trustee of a trust. Companies are usually only able to fund their obligations out of shareholders funds. If a company is formed with only a nominal amount (e.g. $2) of shareholders funds then the potential for loss is minimised. TAX TIP You should ensure that, where there is the potential for the trustee to be responsible to third parties as a result of acting as a trustee (e.g. where a business is being conducted in the trust), the trustee itself does not hold any assets. In the case where the trustee owns assets in its own right, these assets, as well as the assets of the trust, will be available to satisfy creditors of the trust. TAX TIP It is often beneficial to use a corporate trustee, even where a trust will not engage in trading activities. If an individual is used as trustee, as only their name will appear on many ownership documents for the assets of the trust, it may be argued that any assets held in trust are actually that individual s assets as opposed to those of the trust. Using a corporate trustee makes it clearer that the assets are held on trust. Furthermore, the inclusion of an indemnity clause in the trust deed and the appointment of a corporate trustee together provide an effective form of limited liability for a trust structure. Following the decision of the Full Federal Court in Bruton Holdings Pty Limited (in liq) v FCT [2011] FCAFC 79 it was also determined by the Federal Court that a corporate trustee of an estate in liquidation could be indemnified for legal costs incurred in actively protecting and maintaining trust property after the trust had been wound up and a liquidator appointed. WARNING You should also consider the potential liability issues faced by the director of a corporate trustee. This is discussed in more detail in 1.4: Personal liability of directors. The beneficiaries The beneficiaries of a trust are those persons or entities who are entitled to benefit from the income and/or capital of the trust. There are no restrictions on the type of entity who may be a beneficiary. Thus, individuals, companies, partnerships, charities, minors and other trusts may all potentially be beneficiaries of a trust. Further, beneficiaries may be residents or non-residents for Australian tax purposes. 8 CPA Australia Ltd 2011

15 Whether a beneficiary s interest in a trust is fixed or discretionary will depend upon the nature of the trust, and the class of beneficiary. It should be noted that a potential beneficiary (or object) of a discretionary trust only has a vested and indefeasible right to a distribution upon the trustee exercising a discretion to appoint them as a beneficiary. If a distribution is made by a trustee to someone not included as a beneficiary under the trust instrument, the trustee may have breached its duty to the beneficiaries and the distribution will not be effective for trust law or tax purposes. Default beneficiaries A discretionary or hybrid trust can be set up so that it has default beneficiaries. If the trustee does not decide to distribute the income for the year, these are the beneficiaries who will benefit by default. Such beneficiaries are also known as takers-in-default. Broadly, if income is accumulated in a trust it is currently taxed at 46.5%. Default beneficiaries exist to prevent such a tax liability. Where a trustee (for whatever reason) fails to make an effective distribution, income will, by default, be distributed from the trust to the default beneficiaries who may pay tax at a rate which is less than 46.5%. If the trustee wants the income to be distributed to the default beneficiaries, care should be taken to examine the provisions of the trust deed. In some instances inaction by the trustee will not be sufficient to cause the trust s income to be distributed to the default beneficiaries. TAX TRAP Where a distribution is not made by trustee, or the distribution is not valid, default beneficiary clauses in a trust deed may not be triggered this may cause the income to be taxed to the trustee at 46.5%. For instance, in BRK (Bris) Pty Ltd v FCT [2001] FCA 164 the question was raised as to whether the default beneficiary clauses applied at the end of the income year or the beginning of the next income year. The consequence of the provisions applying in the next income year was that the trustee was assessable on the income in the current year being income to which no beneficiary was presently entitled. Subsequent court decisions have held that default beneficiary clauses do generally apply at the end of the income year. This position will no doubt be subject to further judicial clarification. The trust deed should be examined to ensure that the default beneficiaries will be distributed to at the end of the income year, in case the trustee makes an invalid distribution. Other beneficiaries The other beneficiaries of a trust often fall into two classes, being specified beneficiaries and general beneficiaries. The names these are given in the deed is a matter of personal preference for the person drafting the deed. Specified beneficiaries are those referred to by name in the deed. General beneficiaries are referred to by their relationship to the specified beneficiaries, such as a class of persons. For instance, if Greg is a specified beneficiary of the Darcy Trust, the trust deed would normally include as general beneficiaries any relative of Greg or any company in which he owns a share, or a trust in which he has an interest. CPA Australia Ltd

16 TAX TRAP Before distributing to a beneficiary a trustee should make sure that they are one of the beneficiaries permitted to receive distributions under the trust deed. A distribution to someone not permitted by the deed will be ineffective. Making an ineffective distribution may result in the trustee being assessed on the amount at a rate of 46.5%. TAX TRAP Care should be taken before naming someone as a beneficiary in a discretionary trust deed. Since 1 January 2002 the Social Security income and assets tests have been able to include as the income and assets of an individual the income and assets of a discretionary trust of which they are a potential beneficiary if certain conditions are met. Including someone as a beneficiary may mean that they lose their pension entitlements Application to case study A family discretionary trust would prove an advantageous structure to use for Andrew and Patricia: The trustee(s) could split the income on the investments amongst family members to reduce the family s aggregate tax liability especially by taking advantage of the lower tax rates applying to Andrew and their son. However, the amount of investment income which can be distributed to the son is now effectively capped at $416 from the year ended 30 June 2012 onwards as such a minor will not be able to apply the low income offset to reduce the tax payable on such income from 1 July Amounts in excess of that threshold will be taxed thereafter at punitive rates of tax under Division 6AA of the ITAA36 as discussed below in the commentary in Chapter 2. The trustee(s) could also make a particular beneficiary of the trust specifically entitled to any future capital gain on the disposal of any investments if such streaming is permitted by the trust deed, and the relevant streaming requirements set out under Subdivision 115-C of the ITAA97 are met. This will be most attractive where a beneficiary such as Andrew is on a low marginal tax rate, eligible for the CGT general discount and/or has access to capital losses. The trust structure would provide a degree of asset protection for Patricia who will be exposed to personal liability risks following her appointment as a director of her employer company. Andrew and Patricia would, however, need to determine what role different people would play in the trust. Settlor you would ask Andrew and Patricia if they had a family friend that could settle the trust for them. In the absence of a convenient friend, you could settle the trust for them. Appointor as both Andrew and Patricia have come to see you it is likely that both will want to occupy the position of appointor. You would talk through with them the impact of this should either of them become bankrupt. Trustee if there was the potential for Patricia or Andrew to be made bankrupt you would counsel them to use a corporate trustee, or at least to use only the individual that is not potentially going to become bankrupt. This is because if an individual trustee becomes bankrupt there may be an argument with the trustee in bankruptcy whether the trust s assets are in fact 10 CPA Australia Ltd 2011

17 the assets of the individual rather than that of the trust. Should only one of them be a trustee it would also mean that, in the case of a relationship breakdown, they could take the assets from the trust. Beneficiaries you would likely counsel Andrew and Patricia to name themselves and their son as primary beneficiaries and to name a group of general beneficiaries with reference to them. You would establish whether anyone that they are related to is on Centrelink income or asset tested benefits and ensure that naming such a person as a potential beneficiary would not jeopardise their social security entitlements. CPA Australia Ltd

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