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Why you need to review your trust deeds

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Many individual’s setup trust arrangements to run their business affairs or hold investments. The benefits created can be significant in terms of asset protection, succession planning and favourable tax outcomes.

However, there have been significant changes to the Trust Taxation Laws over the past few years resulting in many existing deeds requiring an amendment to either allow streaming and/or improve the overall effectiveness of the deed in relation to the distribution of income, net income and capital.

What does this mean?

If you have a hybrid unit trust, fixed unit trust or discretionary trust which was established by a trust deed entered into prior to 2011, it is important that you have your trust deed reviewed to ensure that it is compliant with the major legislative changes and judicial decisions that have taken place since that time.

At the very least, trust deeds created before 2011 are at risk of failing to comply with those principles established by the landmark High Court decision in Bamford1 and the subsequent changes made pursuant to the Tax Laws Amendment (2011 Measures No. 5) Act 2011 (Cth).

Whilst this doesn’t necessarily render the trust deed void or invalid, it does mean that the trustee is limited by the terms of an uncompliant deed which may result in the exercise of certain discretions and powers of the trustee as being ineffective.

Some of the risks of having an uncompliant trust deed include:

  1. the risk that the trustee becomes “presently entitled” to trust income and therefore liable to taxation itself, instead of its beneficiaries, due to ineffective distribution clauses;
  2. the inability of the trustee to “stream” certain types of income to certain beneficiaries (for example capital gains and income amounts);
  3. the inability to assign certain expenses against certain income categories; and
  4. the risk of double taxation due to the trustee’s inability to adjust amounts otherwise assessable to beneficiaries in accordance with the trust deed.

Regardless of the trust structure in place, the income distribution of the trust estate must be resolved prior to 30 June each year.

If you have not had your trust deed reviewed recently or would like to discuss your individual situation, contact your DPM adviser here.

Alternatively, you can contact Fletcher Clarendon directly to discuss the work involved in ensuring that your trust deed is compliant.

1. Commissioner of Taxation v Bamford [2010] HCA 10

Disclaimer: The content of this article was written by Fletcher Clarendon’s legal team. The information contained in it is general and is not intended to serve as advice. DPM Financial Services Group recommends you obtain advice concerning specific matters before making a decision.

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