A trust is a relationship and not an entity. It is a relationship amongst trust properties, trustees and beneficiaries.
A trust is not an entity for income tax purposes under the Income Tax Assessment Act 1936 as trustees are liable to lodge tax returns. However, trusts are entities under the A New Tax System (Goods and Services Tax) Act 1999 and obligated for GST payment as well as made eligible to claim input tax credits from the Australian Taxation Office.
The origin of common law trust is found in the Statute of Uses 1535 in England around 1535 CE where the landholders used to convey the land to another person to hold for the “use” (benefit) of a third person or persons. Land held subject to use by others escaped feudal dues on the death of the landholder which was an olden structure of tax planning.
In the contemporary World, a trust is used as a vehicle for investment, asset protection, securing borrowings, business operation and philanthropy. The application of trust structures has become a prominent feature of business and finance in modern industries and family wealth management.
There are three main elements of a trust: the trustee on whom the fiduciary obligations are imposed, the trust property/asset entrusted to the trustee and the beneficiary or beneficiaries for the use of whom the trust is established in order to serve a purpose recognised by law.
There is a statutory limitation that a minor cannot be a trustee while a statutory extension allows liquidators and executors to be trustees. Trustees must be of ordinary prudent person of business, performing moral obligations, having a duty to account, duty to act impartially and duty to provide information.
They must have a duty not to fetter discretions, duty to pay correct beneficiaries, duty not to delegate (unless expressly allowed in the trust deed), duty to act gratuitously (unless expressly permitted) and duty to invest trust assets.
The terms of a trust deed should include trustee powers, beneficiary entitlements, trust income, satisfaction of entitlements, vesting date and the deed amendment powers. Beneficiaries could include a person, a company or a trustee of another trust.
A trustee cannot be a beneficiary of the same trust except in a self-managed superannuation fund which is treated as a trust. The corpus or the trust property may include any type of assets such as cash, securities, income streams, real estate or life insurance policies.
A trust may be terminated at the end of the perpetuity period or at the vesting date or it could be terminated by beneficiaries at any time.
There are various types of trusts operating in Australia including:
(1) Discretionary Trust (trustees have the discretion to distribute income to beneficiaries who do not have a fixed or specified entitlement to the capital, assets and income of the trust);
(2) Fixed Trust (beneficiaries have fixed entitlements to the capital, assets and income of the trust);
(3) Bare Trust (Trustees hold the trust property or income until beneficiaries are, say, old enough to return it to them);
(4) Unit Trust (corporate trustees hold and administer the assets or units of money for the holders of units in the Unit Trust);
(5) Hybrid Trust or Managed Investment Scheme (a hybrid between Unit Trust and Discretionary Trust);
(6) Charitable Trust (trustees carry out charitable activities as defined in the trust deed) and
(7) Superannuation Fund (trustees of public offer superannuation funds and self-managed superannuation funds mange them during 3 phases: contribution, accumulation and distribution to beneficiaries).