Trusts 043-04020000

Item

Description

1

Creating a trust

Trusts may be established by law or by individuals. They may also be declared to exist by a court although no documentation establishing a trust exists.

A settlor or creator may provide the initial contribution to start the trust or a trust may be established on the death of a person to hold the residue of their estate. A trust may also be formed to hold monies awarded by a court (for example, transport accident compensation).

Private trusts created by the express and intentional declaration of the individual, usually in the form of a deed or will, are referred to as express trusts. Most of the private trusts that the Complex Assessment Officer (CAO) will be assessing are of this type.

However, there are occasions where a customer claims that a trust exists even though there is no trust deed or will. In these cases, Services Australia may need to seek legal advice in order to determine whether a trust exists or not. These types of trusts may be referred to as constructive, resulting, secret, implied or presumptive trusts.

2

Date a trust was set up (or activated)

If it is necessary to determine the date a trust was set up (or activated), refer to the Mod PT.

This may be:

• the date of death (for a testamentary trust)
• the date of commencement of the trust deed (often recorded in the schedule of the deed) (for an express trust)
• the date of declaration of the trust
• the date of correspondence between the parties and/or their solicitor, accountant or other professional
• the date a caveat was lodged on the real estate said to be held in trust
• the date documents show responsibility was taken by a beneficial owner of property for mortgage repayments and/or other expenses related to a property for which the owner would generally be responsible
• the date tax returns show the beneficial owner recording any income from the real estate said to be held in trust (for a trust that is not an express trust)

3

Before winding up a trust

Prior to a trust being wound up, the trust may:

• lie dormant
• have its trustee company deregistered
• go under voluntary administration, or
• go into receivership

Although a trust may lie dormant for many years, all other arrangements such as deregistration, administration and receivership would generally commence and be resolved within a matter of weeks or months.

On wind up of a trust, creditors are paid the amounts they are owed and the residue of the trust funds is transferred to beneficiaries in accordance with the terms of the trust deed.

4

Dormant trust

A trust that is not trading may be referred to as 'dormant'. This does not mean the trust has ceased to exist or been wound up. It may however, indicate that no tax returns have been lodged with the Australian Taxation Office (ATO) for a number of years. A trust that is dormant may still hold assets.

If a customer states they are involved in a private trust that is dormant, the documents required to assess a private trust will need to be obtained before an assessment can be made by the CAO of the customer's income and assets in respect of their involvement in that trust.

If the dormant trust has no income and no assets or liabilities then under common law it is deemed to be vested.

5

Deregistration of corporate trustee (Trustee Company)

A trustee company may be deregistered. This does not necessarily mean that the trust has been wound up. The trust may continue to operate with a natural person taking on the role of trustee in place of the corporate trustee.

6

Wind up - options

Basically there are three main options, which are not mutually exclusive, for the winding up of a trust:

• Distribution of trust assets to beneficiaries if authorised expressly or by inference by the trust deed
• Release or variation of the trust obligations, either by the trustees or the beneficiaries or by a court. Trust obligations can be brought to an end by release by the trustee of the trust obligations, variation of the beneficial interests and by the assignment of beneficiaries' rights
• Sale or disposition of the trust property or business and distribution of the proceeds
• Not operating and having no outstanding liabilities or assets

7

Wind up - perpetuity period and vesting date

The trust deed for a trust may state a perpetuity period or vesting date for the trust. The perpetuity period is the period the trust is intended to operate before being wound up. The vesting date is the date the trust funds are intended to be vested, that is transferred, to the beneficiaries.

If a trust winds up as intended, the creditors and all expenses are paid and the residue of the trust funds will be transferred to the beneficiaries in accordance with the terms of the trust deed.

8

Wind up - solvency and liquidation

A trust may be wound up before the intended vesting date. For example, a trust may become insolvent and enter an agreement whereby it pays out creditors a certain amount of cents per dollar owing.

A solvent trust may also wind up before the vesting date in accordance with the rules of the trust deed. For example, the trustee may distribute all the capital of the trust. For example, all living beneficiaries of a will may agree that a deceased estate be wound up.

Once the trust is thus wound up or vested, the trustee company may be de-registered or liquidated Since a trust derives its legal status from its trustee, if the trustee is a company, then it may also need to be liquidated or de-registered (providing the company does not hold assets or trade in its own right).

Creditors of a trust may be of two main types; secured or unsecured. Secured creditors hold property of the trust as security for, as guarantee of payment of, a debt owing by the trust. Unsecured creditors hold no such security.

A secured creditor may call in the security held and sell or realise the asset to recover the monies owed to them. If there is a shortfall between the money owed to the secured creditor and the value of the security, the balance owing to the creditor is treated in a similar manner to monies owed to unsecured creditors. If the amount realised on the sale of the security is more than the amount owed to the secured creditor, the balance reverts to the trust.

A trust may continue to exist and operate a business after receivership. Services Australia will still need to obtain the documents required to assess a private trust before an assessment can be made of the customer's income and assets in respect of their involvement in that trust.