AUSTRALIA Law and Practice Contributed by: William Moore, Frank Hinoporos, Emma Woolley and Todd Bromwich, Hall & Wilcox
according to the number and/or type of units held by beneficiaries. • Testamentary trusts are created by the terms of a Will, through which the deceased’s estate passes to a trust for the benefit of the beneficiaries, provid - ing asset protection, tax planning flexibility, protec - tion for vulnerable beneficiaries and succession mechanisms. • Special disability trusts are established for the ben - efit of a severely disabled family member, attract - ing means-test concessions for the recipient and exemptions for the contributors. • Superannuation proceeds testamentary trusts are established, either inter vivos or by Will, to hold superannuation death benefits, and are designed to ensure these funds are distributed in a tax- effective and protected manner for “death benefit dependants” under Australian superannuation and tax law. • Charitable trusts are established for charitable pur - poses. These are popular due to their relative ease of establishment and the benefits of charitable registration (ie, status tax exemptions). Recent developments have not changed the funda - mental nature of trusts, but they highlight the impor - tance of compliance with complex tax rules to avoid unintended tax outcomes, and the need for trustees of discretionary trusts and testamentary trusts to go through a thorough process to give real and genuine consideration to all beneficiaries of these structures. 3.2 Recognition of Trusts Trusts are recognised and respected in Australia as an established structure for estate planning and asset protection, governed by the relevant Trustee Act in each Australian jurisdiction. Trusts have a broad application across Australia and are commonly used for: • succession planning purposes, particularly given the rise of second/third marriages and blended families; • protection from creditors – trust assets are held by the trustee and may not be available to third-party creditors of a beneficiary; and
• family law advantages – trusts may provide some protection for assets in family law disputes (depending on the circumstances). Unlike companies, trusts are not legal persons; they are fiduciary relationships where the trustee holds legal title to manage assets, while beneficiaries hold equitable title. This separation is a core protective function. While a trust is not a separate legal entity, it is recog - nised by the ATO for tax purposes and has strict legal and tax obligations that must be followed. 3.3 Taxation of Trusts, Foundations and Similar Entities Located in Other Jurisdictions Australian residents who are beneficiaries of foreign trusts are taxed on distributions, including capital gains and income. If an Australian resident acts as trustee or appointor of a foreign trust, the trust may be deemed an Australian resident trust, subjecting its worldwide income to Australian tax. Where a person holds dual roles (eg, settlor and beneficiary), attribu - tion rules and anti-avoidance provisions may apply. Careful structuring and ongoing review is essential. Section 99B Distributions of capital from foreign trusts to Austral - ian resident beneficiaries may be taxable, unless the distribution is sourced from the original trust corpus or another exclusion applies. Whether a distribution is from corpus is largely a question of evidence and may require detailed records to demonstrate the source of the funds. If the distribution is not clearly from the original capital of the trust, it may be treated as income and subject to Australian tax in the hands of the beneficiary. Transferor Trust Rules The transferor trust rules are designed to ensure that Australian residents cannot use offshore trusts to accumulate income without paying Australian tax. If an Australian resident has transferred assets or value to a foreign trust, they may be taxed on the trust’s income as it is earned, even if the income is not distributed to them. These rules apply more broadly to trusts in low-tax countries and more narrowly to trusts in coun - tries with tax systems similar to Australia. Exemptions
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