|Build these documents online||Price|
|Acknowledgement of Trust Deed – ‘AFTER the Trustee buys’||$850|
|Gifting Trust – ‘deathbed declaration’||$349|
|Declaration of Trust BEFORE you buy – ‘secretly buy’||$349|
|Bare Trust – ‘hide assets you own’||$660|
Here is an example of a ‘trust’:
The bank account is preserved for your son, who, as beneficiary, is the ‘true’ owner of the asset. The courts and the ATO ‘look through’ the trust to see who the ‘true’ owner of the assets are. In this case, the ‘true’ owner is your son – not you.
Most people when they own an asset hold both the legal and beneficial interest in the asset. There is no trust if you hold both the legal and beneficial ownership. In contrast, in a trust the legal and beneficial interests are held by different people:
A trust automatically exists when you separate the ‘legal’ and ‘beneficial’ ownership.
If your son, at 18, removes you as the Trustee and puts himself in as the legal owner, then the trust is finished. It is extinguished. This is because your son now holds both the ‘legal’ title and ‘beneficial’ interest. The split of the ownership has gone. The trust relationship no longer exists.
After the Trustee and Beneficiary, the third requirement for a trust to exist are the Trust Assets.
The trust assets can be anything. Trust assets may be real estate, shares, artwork, cars, bank accounts and cash.
The four most common trusts in Australia are:
A trustee who has no discretion and whose only active duty is to convey the property at the direction of the
beneficiary or beneficiaries is a “bare trustee”. See Gummow J in Herdegen v Federal Commissioner of Taxation (1988) 84 ALR 271, 37.
Yes, a Bare Trust can hold an asset for more than one beneficiary.
E.g. 14,000 BHP shares for John Smith, Mary Smith and Smith Nominees Pty Ltd.
However, the problem is how many shares does John own? How many does Mary own? And how many does the company own? You would need to have a minute setting out the number of shares each of those three persons own. Or prepare 3 separate Bare Trusts.
A Bare Trust is the relationship between the trustee and the beneficiary. It does not document the relationship between the beneficiaries themselves.
Under Australian trust law the trustee must act in the best interest of the beneficiary. The trustee cannot break the faith and provide information to third parties. To do so is a breach of faith.
To act ‘in good faith’ is to act honestly or sincerely. This is without an intention to deceive or hurt the beneficiary. This is also known as acting bona fide.
Each law firm builds their bare trust deeds differently. But in a Legal Consolidated bare trust deed, it is illegal for a trustee to accept a payment (bribe) to release the identity of the beneficiary. Confidentiality is often the main reason why you set up a bare trust in the first place.
For example, you may wish to hide the true owners from from competitors and other stakeholders in the same or similar industry.
Of course, an Australian law may override this. And the Courts, Family courts, Bankruptcy courts, ASIC and the ATO require full disclosure.
Further, it is usually pretty obvious to the ATO as to who the beneficial owner is. This is because the beneficial owner, must by law, disclosure taxable income from the asset being held in trust on their personal tax return.
This is an interesting article on where the trustee tried to keep secrets from the beneficiary.
A human can be trustee of a bare trust. This is called a ‘human trustee’.
Or a company can be trustee of a bare trust. This is called a ‘corporate trustee‘.
If you are talking about confidentiality then it would make no difference whether you have a human trustee or a corporate trustee.
If you are talking about asset protection, then, yes, a company as a trustee provides better insolvency protection.
Q: The Bare Trustee is going to holds some listed shares. This is in trust for the Trustee of a Family Trust.
What will show on shareholders’ register?
A: Generally, the public listed shareholders’ register just shows the Bare Trustee name.
Consider the four most popular ‘bare’ trusts in Australia:
You sign a Declaration of Trust BEFORE you make an offer to buy something:
You own 7 out of 8 of the units in the same block.
The last unit finally comes onto the market. The vendor knows that you own all the other units. He smugly is going to hold out for a lot of money. But you never approach the vendor.
Instead, you get a friend to sign a Declaration of Trust Before Purchase. Your friend is the Trustee. You are the beneficiary.
Armed with the duly signed Declaration of Trust the Trustee presents an offer to purchase the unit to the vendor.
Upset that you never made an offer to buy the flat the vendor sells the flat for ‘nothing’.
The vendor sells the home to your friend. The vendor is unaware that you are the true purchaser.
Your friend delivers the contract of sale to you. Using the Declaration of Trust Before Purchase the property settles in your name for no additional stamp duty or any CGT. The vendor is furious. But there is nothing he can do.
You are the ‘true’ owner. At any time, the beneficiary can direct, the Trustee, to transfer the asset to the beneficiary. There is generally no stamp duty or Capital Gains Tax (CGT) for the transfer from the Trustee to the Beneficiary.
Build Declaration of Trust Before Purchase the property here.
Each State has its own Transfer (Stamp) Duty rules:
While your Trustee proceeds to buy the asset for you, there is no deed yet to record that trust relationship. Trust relationships can exist whether they are in writing or not. They are just a lot easier to prove if everything is in writing.
Whether there is a deed or not the Trustee still ‘owns’ the asset merely as a Trustee for another person being the beneficiary.
But without a Deed you face an up hill battle ‘proving’ that you are the trust owner (beneficiary). And that your friend (trustee) is a mere trustee of the asset. These 4 people will call you a liar to your face. It is your job to have evidence to prove them wrong:
‘Nice try. But only after your precious son decides to get a divorce do you, as his parents, try some feeble argument that the property in your son’s name actually belongs to you.’
sarcastically states the Family Court judge.
You can not argue both a bare trust and a loan.
The parents should have had their son sign the above a Declaration of Trust Before you Purchase. But you didn’t. So now you are building the second best document. You build the Acknowledgement of Trust.
(Alternatively, you could have lent the money to your son. But again you should do that before you actually lent the money.)
What about Family Trusts vs the Family Court?
Your business is going under. Hang on a minute. You hold the family home as bare trustee. After all, the money for the home came from your wife’s bank account.
Well that argument may or may not work. You should have signed a Declaration of Trust Before you Purchase (or a Spouse Loan Agreement). But you didn’t. So now you have to build the poor cousin: Acknowledgement of Trust.
You will need more evidence of the bare trust, than the fact, that the money for the home came from your wife.
You told your accountant 9 years ago that while the farm is in your name you are just a bare trustee. This is for your dad. You, the son, are the bare trustee. Your dad is the true owner. Your dad is the sole beneficiary.
There are 3 requirements for a bare trust. They are:
So you claim a bare trust. But you have to prove that. What evidence do you have? Where are the letters, emails, cheque butts, transfers of money to prove the trust relationship?
The ATO does a random audit. The ATO hears your story. Not a problem says the ATO. Just show me the Declaration of Trust Before Purchase. You and your dad never did one.
It is never to late to now build an Acknowledgement of Trust. It may not work. But it is the best you can do.
What if you cannot prove that dad is the true owner? Then the farm’s income is put on your personal tax return. The ATO amends your old tax returns, accordingly. The ATO adds interest on this ‘late’ tax. (This is called the General Interest Charge – GIC.) The ATO also imposes a 200% penalty. Unable to pay the ATO bankrupts you and sells the farm.
You have been holding the block of flats in Double Bay, Sydney on behalf of your brother.
Thankfully, your brother now directs, as the beneficiary, for you to transfer the property into his name. As the sole beneficiary he has the absolute right to do this. And you must comply under trust las.
You turn up to have the transfer ‘stamped’ at the local State Revenue Office. There is no transfer duty when trustees transfer property to the sole beneficiary.
“That’s right” states the stamp duty man. “Just show me your Declaration of Trust Before Purchase. And I will stamp your transfer for free.”
It is never too late to build a Acknowledgement of Trust AFTER you buy.
Obviously it is better to sign an Acknowledgement of Trust BEFORE the ATO, stamp duty office, family court and bankruptcy Court start their attack.
The Acknowledgement of Trust may not work. But it is the best you can do.
The Acknowledgement of Trust is drafted after the purchase by the Trustee. The Acknowledgement of Trust does nothing other than document what has happened in the past. It isn’t trying to rectify or change anything. It merely records what actually happened in the past.
It would have been better to have documented this trust relationship before the Trustee acquired the asset. Before the Trustee acquired the asset you should have built and signed a Declaration of Trust Before Purchase. But you didn’t. So you are now documenting what you did in the past with an Acknowledgement of Trust. It is better late, than never.
The Acknowledgement of Trust merely sets out the facts that took place in the past. As an example you may say:
‘Yes, as a Trustee, I acquired the asset, but it was, at all times, for the benefit of the beneficiaries. I have no interest in the asset other than as the Trustee. The money to pay for the asset came from the beneficiary, not from me. And I have plenty of evidence like cheque butts and emails to prove this.’
All the Acknowledgement of Trust is doing is recording, by way of Deed, the trust relationship that already exists.
There is a real risk that the state stamp duty office or the ATO may not believe you and seek to inflict stamp duty and CGT on the Acknowledgement of Trust Deed. Be careful. Make sure you have plenty of evidence that at all times the beneficial owner was and remains the beneficiary (cheque butts, bank statements, emails etc…)
You need to prove that this Acknowledgement of Trust changes nothing. You were always the Trustee of the asset for the beneficiary. You need evidence it has always been the case.
Why did the beneficiary want you, as Trustee, to acquire the asset as Trustee in the first place? There are many reasons. These are both personal and private. For example, the beneficiary may have wanted you to buy the asset as Trustee because the beneficiary didn’t want the vendor, the public or a spouse to know what the beneficiary was up to.
Before the Gifting Trust is created the ‘original owner’ holds both:
interest in the asset.
For bare trust you need three things: Trustee, Beneficiary and Trust Asset. The Trustee and Beneficiary must be different persons. Therefore, before you sign the Gifting Trust there is no trust. This is because the person holds both the ‘legal’ and ‘beneficiarl’ interest in the property.
When the Gifting Trust is signed, from that point forward:
In other words, the ‘original owner’ still holds the assets. But now the ‘original owner’ only holds the asset as bare trustee for another person. This lucky person is the beneficiary.
Therefore, there is no change of ownership at the local titles office. But there is still full stamp duty and Capital Gains Tax on the ‘disposal’ of the equitable (beneficial interest) to the beneficiary. The taxes are levied on the Gifting Trust Deed.
The asset remains in the owner’s name. But transfer (stamp) duty and CGT apply. This is because the deed transfers the beneficial ownership to another person – being the beneficiary.
The stamp duty and CGT is the same amount as if you transferred both the legal and equitable interest. The taxation regimes inflict stamp duty and CGT when the beneficial interest in an asset changes – not when the legal ownership is changed.
These are often called ‘death bed declarations’. For example, Dad, knowing he will die shortly, using a Gifting Trust declares that he now holds all his assets in trust for his oldest son. After his death, the other children challenge his Will – but there are no assets in his Will. Therefore, there is nothing to challenge.
That is true. But Dad owned those assets (now Trust Assets) merely as a Bare Trustee.
Except for a Considered Person Clause in your Will, Professor Brett Davies is right, nothing usurps the court’s power. This is to rewrite your Will. But Dad has no assets that he beneficially owns in his Will. He gave them away via a Gifting Trust . This is before he died.
From that point on the son pays tax on income from the asset. The assets are still in dad’s name. But the courts and the ATO look through the trust. This is to the ‘true’ owner. And that is Dad’s oldest son.
There are two reasons:
Before the Bare Trust is created the beneficiary is both the legal and equitable owner. Therefore, there is no trust in existence since the ‘legal owner’ and ‘beneficiary owner’ are the same person. In other words, the beneficiary, before this Bare Trust is signed owns both the ‘legal’ and ‘equitable’ interest in the asset.
In the Bare Trust the beneficiary transfers to the Trustee legal ownership only. Under the Bare Trust the beneficiary retains the beneficial interest in the asset. The Trustee only takes on the legal ownership. Neither before nor after the Bare Trust does the Trustee have any beneficial interest in the asset. The beneficial owner remains the beneficial owner.
The ATO and State stamp duty office look through the trust. They see that the ‘true’ owner. The beneficial owner is not changed. Therefore, there is generally no CGT or stamp duty.
The beneficial owner (not the legal owner) continues to pay tax on income generated by the asset. The beneficial owner continues to be liable for the costs of maintaining the asset.
Nothing changes except that the asset is now in the hands of another person – the Trustee. For example, if you transfer the property, pursuant to the Bare Trust, to the Trustee, generally, without any CGT or stamp duty.
You feel vulnerable in the public and reporters knowing what land you own. It is no one’s business, other than your own, and the ATO, of course. You transfer your real estate to a bare Trustee generally for no stamp duty or CGT. When someone does a search at the local titles office your name does not appear anywhere. The ‘true’ owner is now buried in a private document called a Bare Trust. Build a Bare Trust here.
Adj Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
National Australian law firm
National: 1800 141 612
Mobile: 0477 796 959
Email: [email protected]