Types of Trusts in Australia: A Complete Guide for Individuals and Businesses

Trusts have a vital role to play when it comes to managing your wealth and assets all across Australia. They can protect your finances and support you in long-term financial planning. Trusts present to you flexible ways of securing your future, no matter the purpose you are using it for. Let us navigate through the different types of trusts and the benefits they offer:

Why Set Up a Trust?

There are multiple reasons for someone of setting up a trust in Australia. These include:

• To separate the owner of the asset, i.e., the beneficiary, from the trustee, who controls the asset. 

For instance, it is useful in cases where the beneficiary is underage or suffers from a disability that potentially affects the person’s decision-making.

• To allow you greater flexibility while tax planning.
• To protect your assets from financial claims that have been made against the beneficiary.
• To use trusts as a business entity for both investing and trading purposes. 

How Does a Trust Work?

A trust operates as a legal arrangement where one party controls assets for the other party’s benefit. Wealth is managed securely, along with gaining control and flexibility over profits. Given below is an elaborate discussion through which trusts work in practice:

1. Creation of Trust

This can happen during someone’s lifetime or via a will after they die.  

2. A Trust Deed Sets the Rules

This legal document is responsible for outlining the terms of the trust. These often specify who is involved, which assets are included and instructions on how it should be managed. 

3. A Trustee is Appointed

The trustee is a person or company who manages the trust and makes decisions regarding the distribution of assets. 

4. Beneficiaries are named

These are the organisations or people who benefit from the trust. Benefits might include capital, income and specific assets.

5. The Trustee Manages and Distributes Assets

The trustee may have complete discretion, or they have to adhere to some fixed rules. These are entirely dependent on the kind of trust. 

6. The Trust Ends or Continues

Some trusts are set up for a fixed period of time or until a particular event occurs, for example, a child turning 25. Trusts might also continue across many generations. 

Major Types of Trusts in Australia

Knowing the different types of trusts in Australia and picking the right one for you can become confusing at times. Trusts are unique in specific ways and need to be differentiated on the basis of personal and business goals. Keeping this in mind, here are the eight kinds of common trust structures in Australia:

1. Fixed Trusts 

Fixed trusts are the kind of trusts where the beneficiaries have an already decided fixed entitlement to the capital or income of the trust. The trustee cannot vary how the benefits are distributed since everything works according to the trust deed. 

Here are some key features of a fixed trust:

• Beneficiaries can enforce their entitlements even through legal action.
• It is frequently used in investment structures, for example, property syndicates.
• Requires you to have a well-drafted trust deed in order to avoid any ambiguity.
• Tax obligations are typically passed down directly to each beneficiary. However, the trustee must lodge an annual trust tax return Australia to report the trust’s income to the ATO. 

2. Unit Trusts 

These trusts are a type of fixed trust where the trust’s assets and income are divided into units, just like shares of a company. A particular number of units is allotted to each beneficiary, which determines their entitlement to income from the trust. Given below are some key features of this trust:

• Units can be sold, bought or transferred on the basis of the trust deed.
• Can be registered for GST and ABN when operating as a commercial entity.

3. Discretionary Trusts (Family trusts)

These trusts involve the trustee having full discretion over how income and capital are distributed among the beneficiaries. There are no fixed entitlements of the beneficiaries. Here are some of the salient features of this trust:

• Often opted for by families to manage assets, income and estate planning.
• May be established during life or through a will.
• Generally involves an appointer role, who is the person that replaces the trustee.
• Income might be strategically allocated to decrease tax liabilities. 

4. Testamentary Trusts

This trust is created in your will and only starts functioning after you pass away. It allows you to control how your estate will be managed and distributed over time, instead of directly passing everything to the beneficiaries. Discussed below are some primary features of a testamentary trust:

• This trust can be structured as fixed, discretionary or hybrid, depending on the will.
• Might involve restrictions associated to age, conditions for access and limitations to the use of funds.
• Generally used in Western Australia to reduce the chances of disputes regarding future inheritance. 

5. Hybrid Trusts

In this type of trust, features of both fixed trusts and discretionary trusts are combined. Some beneficiaries might have fixed entitlements, whereas others might receive capital or income at the trustee’s discretion. Let us understand the features associated to these types of trusts Australia:

• Requires a clear and well-drafted trust deed to avoid any chances of confusion in the future. 
• It can involve unrelated investors and family members together. 
• A proper legal structure has to be followed for income splitting and tax planning. A qualified tax planner can utilise this trust structure for your personal and business requirements. 

6. Charitable Trusts

In this trust, support is provided to charitable purposes. These are structured initially to ensure that assets and income are specifically used for approved charitable activities. Let us have a look at their structures:

• Trustee manages the assets for the benefit of one or more charitable organisations.
• Cannot operate for the profit or benefit of private individuals.
• Must adhere to legal requirements specified by WA and federal law to qualify for tax concessions.
• Generally registered under the Australian Charities and Not-for-Profits Commission (ACNC).

7. Superannuation Trusts

These are governed by a trust deed, along with the superannuation legislation (SIS Act). Trustees manage these trusts with the best interests of members at heart. These kinds of trusts can be beneficial since they can help in retirement savings and death benefit payments. Self-Managed Super Funds (SMSFs) equip members with full control but also require strict compliance and reporting. 

You can also consider consulting with an SMSF accountant Perth to ensure your funds are satisfying regulatory requirements, maximising the investment performance for your retirement goals. 

8. Bare Trusts

A bare trust is a simple trust, where the trustee holds assets on behalf of a single beneficiary. This person has the complete right to both the capital and income. These trusts are commonly used when trustees hold assets for minors or for nominee purposes. 

Let’s understand some insights regarding a bare trust:

• The beneficiary has complete control and has the right to demand control of the assets at any point in time.
• The trustee does not have discretion; he or she must follow the beneficiary’s instructions. 
• Not suitable for complicated estate planning or family succession. 

Trusts for Business Purposes

Using a business trust Australia structure allows a trustee to hold business assets on behalf of the beneficiaries, providing flexibility in how profits are shared. Key features associated are:

• It requires the trustee to take part in annual formal administrative tasks. 
• The trust is required to have its own tax file number (TFN) and ABN.
• Must be registered for GST if the annual turnover exceeds $75000.
• Beneficiaries may be liable to make Pay As You Go (PAYG) instalments on distributions of their share.
• It must also pay superannuation for any employees. You can also consult a small business accountant for better management of financial statements and efficient recordkeeping. 

Also read: What Is Wealth Management and Why Do You Need It in Australia?

Conclusion

Trusts in Australia present you with multiple opportunities to manage your wealth and plan for the future. By partnering with accounting services Perth, you can ensure proper reporting and tax planning in the long run. Well-managed trusts are evidence of long-lasting financial security and well-being for the upcoming generations.