Setting up a family trust in Australia : What do you need to know?

Thinking about setting up a family trust in Australia, but not sure where to start? We understand how difficult it can be, believe us, so we have put together everything you need to know about the process to help you on your way. Always speak to a qualified professional before making any decisions in relation to setting up a trust of any kind, and give Bottom Line Control Sunshine Coast accountants a call on 5471 7077 if you would like any further information.

What is a trust?

According to the ATO, a trust is 'an obligation imposed on a person or other entity to hold property for the benefit of beneficiaries... While in legal terms a trust is a relationship not a legal entity, trusts are treated as taxpayer entities for the purposes of tax administration.' Trusts are normally used for either business or investment purposes, depending on the circumstances.

What is a family trust?

A family trust is a discretionary trust that is usually created to:

Conduct a family business.
Hold assets for a family.
Protect assets.
For tax purposes.

Steps for setting up a family trust in Australia

There a series of general steps you should follow in order to set up a family trust, which are listed below as guidance. We strongly suggest however that you speak to a qualified professional before commencing any steps to set up a family trust, to ensure it is the best option for your needs.

Step 1: Trustee(s)

Step 1 of setting up a family trust is arguably the hardest - determining a trustee or trustees. A trustee can be a range of people including:

Corporate Fiduciary such as a bank or corporate advisory firm.
Professional Individual such as an accountant, an investment adviser or a lawyer.
Non-Professional Individual such as a family member.

In some instances it is best not to choose someone close to you, but it is important to ensure that the trustee/s that are chosen has integrity and are aware of their trustee obligations.

Step 2: Beneficiaries

Step 2 is to determine who the beneficiaries are of the family trust. Beneficiaries possess a right to trust income or other trust property in relation to the family trust, so this step is very important. The trust deed will define some limitations in relation to the beneficiaries though, depending on what has been agreed between the parties, including:

How far a beneficiary's entitlement goes.
The nature of a beneficiary's entitlement e.g. percentage, fixed amount, at the trustee's discretion.
Define the class of person that can be a beneficiary e.g. corporate bodies, family members, foreign persons etc.

Step 3: Trust Deed

A discretionary trust deed must then be drafted up that is legally binding. Remember that trusts can be quite complex and specific to your exact circumstances, so always speak to a qualified professional in relation to this step in particular.

Step 4: Settle

The next step is for a 'settlor' to sign the trust deed and 'settle' the trust property. This process creates the trust deed for the benefit of the beneficiaries and generally requires the settlor to provide a small monetary amount (around $10 or so) to the trustee.

Settlors are usually someone who isn't related to any of the beneficiaries but may be a close friend who doesn't have any involvement once settlement has been completed.

Step 5: Sign

Now it's time for everyone else to sign! After the settlor has signed the trust deed, the trustee/s must call a meeting to agree to their appointment as trustee(s) of the trust and accepting to be bound by the trust deed terms.

Step 6: Stamp Duty

Depending on where you are located, stamp duty may be payable in relation to your family trust. States like Queensland, Western Australia and South Australia do not attract stamp duty, however New South Wales, Tasmania and Victoria, among other places, have varying stamp duty costs. Always speak to the relevant authorities in your state or territory as to stamp duty amounts, payment terms and time restrictions, to ensure you complete any and all necessary requirements properly and on time.

Step 7: ABN and TFN

Once the family trust has been established, it requires both an Australian Business Number (ABN) and Tax File Number (TFN). If unsure, get some professional help!

Step 8: Bank Account

The final step when it comes to setting up a trust is opening a bank account. This account should be opened in the name of the trustee ‘as a trustee for the trust.’ The settlement sum should be the first amount deposited and should be there before any other deposits or transactions are made.

What about setting us a family trust for a family business?

Setting up a family trust for a business isn't just for one sole purpose - sure there are tax reasons, however there are management reasons that a family trust is a good idea too. It is best to speak to a professional if it is your intention to set up a family trust for your family business, as there are a range of factors that must be considered both before and during the set-up process.

Why set up a family trust?

There are a range of positives when it comes to setting up a family trust, but there are some negatives too (just like anything).

Advantages

Tax Minimisation: Distributions by a trust result in lower incomes for tax purposes.
Property Investment Flexibility: Trusts have much looser rules than super when it comes to holding assets e.g. property.
Retirement Planning: As family trusts are quite flexible, this offers the potential for wealth to be accumulated and then used in conjunction with superannuation amounts following retirement.
Capital Gains Tax: Family trusts have CGT benefits that companies do not have, as there is a 50% discount on capital gains for assets held over 1 year (this does not apply to companies).
Asset Protection: An example of this is purchasing a home for a child to reside in but not needing to forfeit ownership, as the ownership remains with the family trust.

Disadvantages

Distribution of losses: Capital or revenue losses can not be distributed to the beneficiaries of a family trust. This therefore means that if the trust suffers a net loss, none of the beneficiaries can offset that loss against any other assessable income that they may have.
Tax risks: Never complete any sort of 'tax avoidance' behaviour - speak to your tax accountant and they can act accordingly.
Ownership name of assets: If a trust owns property, the trustee's name is on the relevant paperwork and they are the legal owner.
Loss of ownership of assets: If property is managed through a family trust, you lose personal ownership.
Administration costs: All of the above cost money and time in the long term.

If you would like some more information regarding family trusts and whether setting up a family trust would suit your circumstances, give Bottom Line Control a call on 5471 7077 and we would be happy to discuss your needs today.

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Resources:

Australian Government - ATO (Trusts): https://www.ato.gov.au/General/Trusts/

Lawpath (Your Guide to Setting Up a Family Trust): https://lawpath.com.au/blog/your-guide-to-set-up-a-family-trust

Australian Government - ATO (Family trusts - concessions): https://www.ato.gov.au/General/Trusts/In-detail/Family-trusts---concessions/

Sydney Morning Herald (Understanding how family trusts work): https://www.smh.com.au/money/super-and-retirement/understanding-how-family-trusts-work-20190701-p522vl.html

Investopedia (How to set up a trust fund in Australia): https://www.investopedia.com/articles/personal-finance/062315/how-set-trust-fund-australia.asp

Finder (What is a family trust?): https://www.finder.com.au/what-is-a-family-trust

ABC News (Trusts and tax minimisation explained): https://www.abc.net.au/news/2017-07-28/trusts-and-tax-minimisation-explained/8752480

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This web page and its contents are general in nature. You should always speak to a professional regarding your exact circumstances before making any decision in relation to creating a trust of any kind, as the information contained on this page may not be suited to your needs.