30/07/2009

Many of us have discretionary trusts and accountants continue to advise clients on the wisdom of structuring their affairs using a discretionary trust. 

In fact they are so ubiquitous that we sometimes forget some of the rules that apply to them or the reasons for those rules.

Recently a client wanted to set up a trust for her and her sons and was going to use funds that she’d saved up for that purpose.  She would then have been the founder of the trust or “the settlor” as it is more commonly called.  What are the rules for “settlors”?

·         The settlor should be a family friend or relative not benefitting from the trust

·         The settlor should not be a professional adviser if possible unless that adviser has acted for the family for a long while and has a personal interest in the family’s welfare.

·         The settlor should not be a company.

·         The settlor should not be able to benefit from the trust.

It would not have been a good idea for her to become the settlor of a trust that at some point she might want to benefit from.  The reason is because of Section 102 of the Income Tax Assessment Act 1936.

            “Where a person has created a trust in respect of any income or property (including money) and:

(a)      he has power, whenever exercisable, to revoke or alter the trusts so as to acquire a beneficial interest in the income derived by the trustee during the year of income, or the property producing that income, or any part of that income or property; or

(b)      income is, under that trust, in the year of income, payable to or accumulated for, or applicable for the benefit of a child or children of that person who is or are under the age of 18 years;

the Commissioner may assess the trustee to pay income tax, under this section, and the trustee shall be liable to pay the tax so assessed.”

This lady will need a completely independent settlor to set up the trust.  To do otherwise could lead to the trustee being taxed on the income thereby losing the marginal rate that would apply to the beneficiaries. 

Fpr further information or advice on Discretionary Trusts, please contact TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.