Date of Issue: 24 January 1992
TRUSTS
Index
An Examiners Guide to Trusts, 11
Assessable Income - Private Discretionary Trusts, 15
Assessable Income - Private Non-Discretionary Trusts, 13
Assets to be held for Pension Assessment, 14,16
Bank account in trust, 9
Constructive Trust, 7
Definitions, 2
Discretionary Trusts, 5,14
Income Tax Returns for Trusts, 17
Loaning and gifting to a Trust, 10
Non - Statutory Trusts, 3
Non-Discretionary Trusts, 6
Overview, 1
Private Non-discretionary Trusts, 12
Public Trusts, 12
Resulting or Implied Trusts, 7
Statutory Trusts, 8
Statutory Trusts for Minors, 9
The Corporate Trustee - Some points to note, 16
Trust Profit and Loss Statements, 12
OVERVIEW
Trusts may be established by law or by individuals. Trusts may also be declared to exist by a court although no documentation establishing a trust exists.
Trusts can be generally categorised as being:
.non‑statutory trusts; or
.statutory trusts.
The effect of a trust on a person's service pension assessment depends upon whether:
. the person is a beneficiary of the trust;
. the person has gifted assets or income to the trust; and/or
. the person has loaned assets to the trust.
DEFINITIONS
2.A TRUST is an obligation binding a person (the trustee) to hold property (the trust property) for the benefit of persons (the beneficiaries).
CREATOR (OR SETTLOR) - this person contributes an amount (usually a nominal amount of $10-$50) to start the trust. Trusts may be established in a will after death.
TRUSTEE - the person who holds trust property for the benefit of the beneficiaries in accordance with the trust document. A trustee may be a natural person or an artificial one (ie a company). A trustee cannot use trust property for his or her own purposes, but is obliged to apply the trust property for the ultimate benefit of the beneficiaries.
BENEFICIARY - the person who may receive a benefit from the trust, either by way of income or capital distributions.
CONTRIBUTOR - a person who contributes capital to a trust, whether by way of loan or gift.
TRUST DEED - a document which:
-identifies the trustee;
-identifies the beneficiaries;
-identifies what the trustee must do (ie obligations);
-identifies what the trustee can do (ie powers);
-specifies whether the trust is discretionary or non-discretionary with regard to distribution of income or capital; and
-for non-discretionary trusts, specifies the beneficiaries' entitlements to income and capital distributions.
-Often, when a trust is set up for private purposes, the trustee is both a beneficiary and a contributor.
3.There are two types of trust which are commonly used, discretionary and non-discretionary.
4.A person who is a trustee only derives no benefit from the trust. Accordingly, pension rate is not affected. However, a trustee may receive remuneration for administering the trust, eg salary or fees. Such a payment is treated as income.
NON - STATUTORY TRUSTS
Overview
5. The majority of non‑statutory trusts are expressed in writing in a document known as the trust deed. The deed will generally not vary the property rights of the parties before the date it comes into existence. Such trusts are generally known as express or declared trusts and include family trusts.
6.A court may decide that a non‑statutory trust exists even though a trust deed does not exist. Such trusts are generally known as constructive, resulting or implied trusts.
7.When a non‑statutory trust is established, the trustee becomes the legal owner of the assets held in trust. However, the beneficial ownership of the assets rests with the beneficiaries of the trust.
8.Although the trustee obtains legal ownership of the trust's assets, he or she is not able to use the assets or income for personal benefit. A trustee is bound to act in accordance with the terms that are expressed in the trust deed.
9.The majority of non‑statutory trusts are expressed in writing. Where a person advises that he or she is a trustee or beneficiary of a trust it is essential to obtain a copy of the trust deed. The trust deed will contain the following information:
. the identity of the trustee(s);
. the identity of the beneficiaries; and
. the nature of the trust (discretionary or non‑discretionary).
It is also necessary to obtain from the person or the trustee(s) details of:
.assets owned by the trust;
.assets loaned to the trust;
.income generated by the trust;
.the current value of assets owned by the trust;
.the people who gifted or loaned assets to the trust; and
.the people who gifted income to the trust.
10.Non‑statutory trusts will be either discretionary or non‑discretionary in relation to:
.the distribution of income generated by the trust; and
.the distribution of the trust's assets.
11.A trust may be discretionary in relation to the distribution of its income and non‑discretionary in relation to the distribution of its assets and vice versa.
12.It is important to ascertain whether a person is a beneficiary of a trust's assets as well as the trust's income. A person who is only a beneficiary of a trust's income has no interest in the trust's assets and vice versa.
13.For the purposes of the Service Pension Income Test, any income that is allocated or distributed to a person who is the beneficiary of a trust is to be maintained as income for 12 months from the date of distribution.
14.One-time only payments out of a trust's capital for a specific purpose are not income for the purposes of the Income Test. An example of a one-time only payment is payment for modifications to a home for use by a disabled person. If a payment was an income distribution it would be shown as such in the trust's taxation return.
Discretionary Trusts
15.A trust is discretionary if the terms of the trust give the trustee(s) discretion:
.as to how the assets of the trust are to be distributed;
.whether to pay or apply income; and
.to choose to whom trust income should be distributed.
16.A person who is a co‑beneficiary of a trust that is discretionary in relation to the distribution of its assets has an asset. However, as the person's interest in the asset is dependent on the trustee deciding in what proportion to distribute the trust's assets, no value can be placed upon the person's asset. In this situation the person has a contingent interest in the trust's assets which is exempted under paragraph 52(1)(g) VEA.
17.A person who is the sole beneficiary of the assets of a discretionary trust is generally considered to have the beneficial ownership of the trust's assets, however, it is possible that a single beneficiary who is also the Trustee, might legitimately claim that they do not hold or have any interest in the asset value of the trust. To correctly assess both asset and income from a trust it is necessary to closely examine the terms of the trust deed before determining that the person is the beneficial owner of the trust's assets. The terms of the trust deed must make it clear that only one person has an absolute interest in the distribution of the trust's assets before the trust's assets can be assessed as that person's assets.
18. Where members of a couple are the only beneficiaries of a discretionary trust and the trust's assets are not exempt, the trust's assets are to be assessed as the couple's assets.
19.When the assets of a discretionary trust are distributed to its beneficiaries, the amount received by a beneficiary is an asset.
20.A person who is a beneficiary of a discretionary trust receives income from the trust only when the trustee(s) allocate or distribute a part or all of the trust's income to the person. A payment made out of allocated income by the trustee(s) on behalf of a beneficiary (eg rent, rates) is income of the beneficiary. Trust income which is allocated to a person but is re-invested in the trust is income of the person. Distribution of trust income is assessed as income for the purpose of the Service Pension Income Test for 12 months from the date that income is received.
Non‑Discretionary Trusts
21.A trust is non-discretionary if the terms of the trust do not give the trustee(s) a discretion:
.as to how the assets of the trust are to be distributed; nor
.to pay income or choose to whom the trust income is to be
distributed.
22.A person who is a co‑beneficiary of a trust that is non‑discretionary in relation to the distribution of its assets has an asset. The value of the asset is determined on the basis of the respective share of each beneficiary of the trust as set out in the trust deed.
For example: where a person is one of five beneficiaries of a trust that has $100,000 of assets and the terms of the trust provide that the beneficiaries have an equal interest, then the value of each beneficiary's interest is $20,000.
23.A person who is the sole beneficiary of a non‑discretionary trust's assets has the beneficial ownership of those assets. Accordingly, the value of the trust's assets are considered to be the beneficiary's assets. The value of the trust's assets will be assessed where they are not exempted under section 52G, (Disposal of assets - not a member of a couple) or section 52H (Disposal of assets - members of couples), of the VEA.
24.A beneficiary of a non-discretionary trust may have an interest in the trust's income depending on the nature and terms of the trust. The share of the trust's income that is allocated by the trustee(s) to a beneficiary is income. Allocations are assessed as income for 12 months from the date of receipt. Periodical payments made to, or on behalf of a person are also income (eg payment of rent, telephone, electricity).
Constructive, Resulting Or Implied Trusts
25.A court may decide that a trust arises from the conduct of the relevant parties although no action has been taken to declare a trust in writing.
26.A constructive trust is imposed on a person by a court whenever the court considers that it would be unconscionable for the person who has legal title to property to deny another person's claimed interest in that property. As a constructive trust is always determined by a court, the terms of the court order needs to be examined to determine the respective interests in the property of the parties.
27.An example of a constructive trust is where a couple live in a de facto relationship and they both contribute to the purchase of their home, the title to which is only in the name of one of them. If they subsequently separate, and the person whose name the house is in claims title to the entire house, a court may order that the person is a constructive trustee for the value of the house proportionate to the contribution made by the other person to its purchase: Baumgartner v. Baumgartner (1987) 76ALR 75.
28.Resulting or Implied Trusts arise in one of two ways. The first way is where there is an original trust set up by the settlor, but the beneficial interest in the trust is not completely disposed of, or a surplus of trust property arises after the purpose of the trust ceases to exist or has been fully satisfied, or the trusts fails for some reason, such as for want of certainty. In these situations the excess trust property is to be held in trust by the trustees for the benefit of the settlor (i.e. the creator) of the original trust.
29.The second way in which a resulting or implied trust is created is where a person purchases property in the name of another person. In this situation, it is presumed, unless there is evidence of an intention to the contrary on the part of the purchaser, that the property is held on trust for the benefit of the purchaser. If two or more people provide the purchase money, the property will be held on a resulting trust for those purchasers in proportions representing their respective contributions to the purchase price.
30.Thus, if a son of a service pensioner contributes 50% of the purchase price to a block of flats held in the service pensioner's name, unless there is evidence of a contrary intention on the part of the son, the service pensioner holds 50% of the value of the block of flats in trust for his son.
31.It should be noted that merely paying mortgage instalments does not necessarily contribute to the purchase price of a property. Where a person makes no contribution to mortgage instalments but is a joint mortgagor, that person is deemed to have contributed equally to the purchase price with the other joint mortgagors to the extent of the value of the original mortgage. Money expended on improvements to property will not confer any beneficial interest in the property to the person expending the money.
32.Claims that a trust exists without it being evidenced in writing will not arise frequently. An example of such a trust is where a person purchasers property in the name of a third party. In this situation the third party may be deemed to be the trustee of the property for the purchaser.
33.There are many complicated situations that can arise concerning resultant trusts and the rules can be confusing. Therefore, when it is claimed that the legal owner of property is only acting as a trustee of that property, full details of the reasons why it is claimed that a trust exists are to be obtained. The person who is claiming to be only a trustee is to be asked to provide whatever information he/she considers to be relevant. When the details are available, consult a delegate or the Investment Policy Officer to determine if Legal Services Group (Central Office) or the Australian Government Solicitor should provide an opinion as to whether or not a trust exists.
STATUTORY TRUSTS
Overview
34.A statutory trust is one which is established by the operation of a law. These trusts are usually established to look after the affairs of a person who is legally unable to attend to his or her own affairs or incapable of doing so. Statutory trusts exist where property is held, for example, by:
.Public Trustees;
.Workers Compensation Boards; or
.Courts.
35.Although the description of "statutory trust" is applied, a trust in the strictest sense is not created. In Flannery v Secretary of the Department of Social Security, (1987) 78 ALR 431, the Federal court recognised Public Trustees and similar bodies are managers, rather than trustees, of property.
36.Where money is held by a Public Trustee or similar body on behalf of a person, the full value of that money is the person's asset and any interest that is generated by investment is the person's income. This is regardless of whether individual accounts are maintained or whether the money is held in a common fund. Assessment of statutory trusts, for example, may come under the umbrella of managed investments.
37.Where a payment is made to a person out of the money held by a statutory trust, that payment is the person's property and is assessed as an asset. That payment then reduces the amount to be assessed as assets held by the trust. One-off payments of a capital nature out of the funds held on behalf of a person should not be taken into account as income.
38.Where money is held by a Public Trustee or similar body and no specific amount or proportion is held for the benefit of the person (for example, the money is held in common for a person and his or her children), the person's interest in the account is a contingent interest and is an exempt asset. Any interest credited to the account cannot be assessed as income until the money is distributed to the person.
Statutory Trusts For Minors
39.Payments to a minor may be held on his/her behalf in a statutory trust. These include:
. third party motor vehicle damages;
. worker's compensation following the death of a sole parent; and
. superannuation following the death of a sole surviving parent.
40.Any money held in such a trust is the property of the minor. Interest credited to the account is the minor's income.
BANK ACCOUNT IN TRUST
41.A person can establish a trust by opening a bank account as trustee for another person (for example, for a child). Such a person is legally obliged in the same way as any other trustee to use the trust's assets for the benefit of the beneficiary.
42.Any amount of money that a person transfers to such an account becomes the property of the beneficiary. However, the disposal of assets and income provisions will need to be considered. Any interest credited to the account is the beneficiary's income.
43.Where it is established that the trustee of the account is using the account for personal benefit, the balance of the account is to be assessed as that person's asset. Any interest is assessed as the trustee's income and the deeming provisions may apply. The Commission's position in these cases is that it cannot be reasonably satisfied that a trust has been created because the person is acting contrary to the duties of a trustee.
LOANING AND GIFTING TO A TRUST
44.A person who loans assets to a trust retains ownership of those assets. Such assets are taken into account in the same manner as other amounts on loan. In these cases the loan would be reflected as a liability in the trust's balance sheet.
45.If a person makes a gift to a trust disposal of assets and income may have occurred.
46.The deeming provisions may apply to assets loaned or gifted to a trust.
FURTHER INFORMATION
47.Attached to this Departmental Instruction is an examiners guide to assessment of trusts for Service Pension purposes. All information included in this instruction will be incorporated within the Complex Service Pension Guide and new "General Orders" to be issued shortly.
PETER HAWKER
NATIONAL PROGRAM DIRECTOR
BENEFITS
17 January 1992
ATTACHMENT TO THIS INSTRUCTION
AN EXAMINERS GUIDE TO:
TRUSTS -
ASSESSMENT FOR SERVICE PENSION PURPOSES
This guide has been prepared to assist examiners in assessing service pension applications and reviews where the claimant has an interest in either a discretionary or non-discretionary trust.
PART ONE
NON-DISCRETIONARY TRUSTS
Public Trusts
These are run commercially, and the public invest by purchasing units,eg. property trusts, equity trusts.
Private Non-discretionary Trusts
Set up by individuals either to hold property or investments, or to run a business.
The non-discretionary trust deed directs how the trust income and/or capital is to be divided between the beneficiaries.
Check the trust deed to find the proportion of capital to which each beneficiary is entitled. Entitlements to income and capital may not be in the same proportions.
A unit trust is a special kind of non-discretionary trust,in which each beneficiary holds a number of units. The beneficiary is entitled to income and capital in the proportion of the number of units held.
Trust Profit and Loss Statements
*The actual amount allocated to a person is the amount in the client's assessment. DVA cannot adjust the profit and loss statement or the distribution schedule.
Where the Trust claims interest on monies owed as a deduction, the examiner should establish whether the client is receiving such a payment. If so, use current balance outstanding and current interest rate (subject to the loan rate) to assess income.
Where the Trust claims salaries and wages as a deduction the examiner should establish whether the client is receiving such a payment. If so, use current amount.
Where a client is a beneficiary of a discretionary trust, assessable income is the amount of distribution which is allocated to the beneficiary (even where the distribution is re-invested in the trust).
*Beneficiaries' Loans represent money owed by the Trust to the beneficiaries. Where a client is a beneficiary of the Trust, examiners should determine what amount, if any, is owing to the client assessable asset) and at what interest rate (assessable income), having regard to the current loan rate.
ASSESSABLE INCOME - PRIVATE NON-DISCRETIONARY TRUSTS
ROLETYPE OF INCOMEASSESSMENT
Settlor Does not
usually receive
any income.
Deprivation of
income may
need to be
considered.
ContributorMay receive — Balance
income in the outstanding
form of multiplied by
interest on current
loans. interest rate*
is held as
Deprivation of ongoing income
income may on an annual
need to be basis.
considered.
Beneficiary Entitlement to Assess on an
proportion of annual basis.
trust income
by way of
distribution
is fixed.
TrusteeMay receive — Current rate
wages, fees payable is held
or salaries. as ongoing
"Out of Pocket" income on an
expenses are — annual basis.
not income.
Combination of Roles A person may have several roles.
In this case, isolate each role and
assess individually.
* May need to take into account the loan rate if loan arranged
after 21 August 1990. Refer Deeming rules for details.
ASSESSABLE ASSETS - PRIVATE NON-DISCRETIONARY TRUSTS
ROLEASSETS TO BE HELD FOR PENSION
ASSESSMENT
SettlorIs not usually entitled to a share of the trust assets.
Deprivation of assets may need to be considered for gifts to the trust.
Contributor Loans made to the trust are assessable assets - refer section 52 of the VEA for further details on interest free loans.
Deprivation of assets may need to be considered for gifts to the trust.
Beneficiary Amount to be maintained is total asset value multiplied by the proportion of ownership as specified in the Trust Deed.
TrusteeIs not entitled to a share of the Trust assets unless also a beneficiary, although asset(s) may be registered in his or her name.
Combination A person may have several roles. In this case, isolate each
of roles role and assess individually.
PART TWO
DISCRETIONARY TRUSTS
.A private trust set up by an individual or individuals (often a family) either to hold property or investments, or to run a business.
.In virtually all cases the Trust Deed gives absolute discretion to the trustee to distribute both income and capital among the beneficiaries as he or she sees fit.
There may be cases where the trust is discretionary with regard to income but non-discretionary with regard to capital, or vice-versa. In this case, refer to the section on non-discretionary trusts for assessment of the non-discretionary aspect.
ASSESSABLE INCOME - PRIVATE DISCRETIONARY TRUSTS
ROLETYPE OF INCOMEASSESSMENT
Settlor Does not
usually receive
any income.
Deprivation of
income may
need to be
considered.
ContributorMay receive Balance
income in the outstanding
form of multiplied by
interest on current
loans. interest rate*
is held as
Deprivation of ongoing income
income may on an annual
need to be basis.
considered.
BeneficiaryMay receive — Distribution
distribution is maintained
at discretion for twelve
of trustee.months.
Trustee May receive Current rate
wages, fees payable is held
or salary.as ongoing
income on an
"Out of Pocket" annual basis.
expenses are
not income.
Combination of RolesA person may have several roles. In this case, isolate each role and assess individually.
* May need to take into account the loan rate if loan arranged
after 21 August 1990. Refer to Deeming rules for details.
ASSESSABLE ASSETS - PRIVATE DISCRETIONARY TRUSTS
ROLEASSETS TO BE HELD FOR PENSION ASSESSMENT
Settlor Is not usually entitled to a share of the trust assets.
Deprivation of assets may need to be considered for gifts to the trust.
Contributor Loans made to the trust are assessable assets - refer section 52 of the VEA for further details on loans.
Deprivation of assets may need to be considered for gifts to the trust.
BeneficiaryGenerally has no enforceable right to receive any part of the trust funds - so no amount is to be held as an assessable asset. However, if the client and/or partner are the sole potential beneficiaries the net value of the trust might, in some cases, be an assessable asset.
TrusteeIs not entitled to a share of the Trust assets unless also a beneficiary, although asset(s) must be held in his or her name.
Combination A person may have several roles. In this case, isolate each
of roles. role and assess individually.
PART THREE
THE CORPORATE TRUSTEE - SOME POINTS TO NOTE
A trustee may be either a natural person or a company (known as a corporate trustee).
The assets and liabilities of the trust may be shown in the company's financial statements. In such cases no assessable income or assets are to be held in relation to the company.
It is possible for a corporate trustee to trade or hold assets on its own behalf, in addition to its role as a trustee.
If the corporate trustee trades or holds assets in its own right the client must be asked to provide separate accounting for these activities.
PART FOUR
INCOME TAX RETURNS FOR TRUSTS
When reviewing a case involving a Trust it may be helpful to view the Income Tax Return to obtain a detailed overview of both income and asset related issues.
Common types of assessable income that you should be aware of are:-
.trust distributions of income to beneficiaries;
.salaries and wages to trustees and beneficiaries;
.interest on loans made to the trust; and
.income "deemed" on loans and/or gifts.
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For more information regarding Trusts please refer to your Supervisor, Delegate, or Investment Policy Officer.