Tax effective clause

To achieve the many advantages that a trust offers, it is important that the trustee is empowered by the terms of the trust deed to make tax effective distribution. A trust should contain these tax effective clauses to ensure that its beneficiaries do not pay more tax than is required and in particular that the trustee is not assessed on the net income of the trust at the top marginal tax rate.

Definition of income

Since the High court decision of Bamfordcase , it is more important than ever that your trust deed contain a robust definition of income. If income is not clearly defined then it will be treated as income according to ordinary concept which does not include capital income.

Income streaming clause

Does the trustee have the power to stream and match distribution of income and capital?

Default beneficiary clause

If the trustee failed to distribute the net income of the trust before midnight 30^thJune, it will be taxed in the hands of the trustee at the top marginal rate. The trust deed should therefore include a default beneficiary clause that will automatically distribute the income of the trust on the 30^th June to its default beneficiary should the trustee failed to make a distribution.

Control stripling clause

As an added protection the trust deed should contain a control striping clause. If the trustee or the appointer becomes bankrupt or insolvent then their position is automatically terminated.

Questions to ask the trust provider

• Does the trust have a tax effective definition of income
• Does the trustee have power to accumulate income
• Does the trustee have power to steam and match distribution of income and capital
• Does the trustee have power to match income to expenses
• Does the trustee have power to make a family trust election and interposed entity election
• Does the trustee have power to offset losses against capital rather than income
• Does the trustee have power to distribute capital before the vesting date
• Does the trust deed have a default beneficiary clause
• Is the settler someone who will trigger the operation of S.102
• What are the powers of the appointer
• If there are more than one appointer , are decisions to be made by the majority or unanimously
• What happens in the event the appointer or trustee dies? How is the trustee or appointer replaced
• If there is more than one trustee, are  decisions to be made by the majority or unanimously
• Does the trust deed have a control stripping clause in the event the trustee or appointer commits an act of bankruptcy
• Does the trustee have power to make compensating adjustments

Trust and Companies account not for personal use

Many family businesses are owned by a family Company or a Trust. Unfortunately, in many cases the Principal’s (Mum and Dad) ignore the company’s structure and run the business as if it was owned by them personally.

They treat the money in the company bank account as it was their own personal money. They withdraw money from the company bank account to pay for personal expenses. This give rise to a potential Division 7A tax as unfranked dividend or potential FBT implications.

Tax Warning

The bank account should not be used as a personal bank account. If money is required, please contact us before drawings the funds. We will then advice you of the tax options in relation to drawing down the funds.  

Our product provider – NTAA Corporate

Their extensive range of discretionary trust and unit trust deeds have been drafted by expert tax lawyers and have been externally peer reviewed to ensure the highest standard. Their discretionary trust deed for example includes a robust income definition clause, an income streaming clause, a default beneficiary clause, a control stripping clause along with all the above features to ensure that our clients can have peace of mind in knowing their trust deed is “state of the art”

Our services include a range of trust including a pedigree trust. A pedigree trust is one name given to a type of discretionary trust that endeavours to ensure that the property of the trust will remain within a particular family, perhaps as defined by direct ( i.e blood ) relationship to a particular individual. Although such trust is often set up in an attempt to protect the trust assets in case of marriage breakdown, they can also be useful in order situations where the principal setting up the trust deed wants to ensure that the benefit of the trust property will remain with his immediate family.