The following guides have been prepared as ‘plain English’ summaries of what clients need to know before operating a new entity, and also to answer some common questions that clients ask about these entities.
Partnership
A partnership is not an entity – it is merely a form of shared ownership of property and an agreement to share certain benefits and obligations between the people (or other entities) that come together to form the partnership.
A partnership can be a relationship between parties carrying on a business with a view to a profit, as well as (for tax purposes) persons in receipt of ordinary or statutory income jointly (i.e., together). This includes persons who jointly own rental properties or shares, and also persons who have a joint bank account deriving interest that they receive jointly.
A partnership agreement normally provides pretty good evidence that the parties intend to be in partnership (although this may not be enough). Other evidence includes joint ownership of business assets (including bank accounts) and joint liability for the debts of the business, the business name being registered in the names of all the partners, and profits being distributed in accordance with the terms of the partnership agreement, if there is one, or equally if there is no partnership agreement.
The above factors are all factors that the ATO takes into account, but if one or two are missing it does not mean a partnership does not exist. Other factors may also be important.
The main advantages of a partnership include:
- Simplicity
- Less costly to establish than a company or a trust (where partners are all individuals)
- Inexpensive to run
- Easy to understand
- Can provide some flexibility in the partnership agreement
- Income splitting between partners
The main disadvantages of a partnership are:
- The partners are jointly and severally liable (i.e., each partner is liable not only for their share of the partnership debts but also those of the other partners. At worst, one partner can be liable for the entire partnership’s debts)
- Generally no asset protection
- Some tax disadvantages
How is a partnership different from a ‘joint venture’?
Often, people say they are going into a “joint venture” together with no real thought as to what they mean. Yet the distinction is very important – if they are in partnership they must share income jointly, whereas in a joint venture the income and deductions are accounted for separately by each of the venture partners.
There is no settled meaning of “joint venture”. A useful starting point is that a joint venture is normally an agreement to share output. For example, two parties may come together to develop a property and build 6 units,, with an agreement that each will be entitled to own 3 units after the development is complete, and that each will account for income and deductions separately. However, if they agreed they would sell the units and split the proceeds, this would be a partnership.
Operating a partnership
There are a number of important issues to consider when operating a partnership.
Consider registration for the tax system
Even though a partnership is not legally a separate entity, there are a number of taxes that the partnership may have to register for, including GST, PAYG and so on. In this regard, advice should be obtained from your accountant.
Open a bank account
After the partnership agreement has been signed, a partnership bank account should be opened. This will be a joint bank account. Banks will normally provide a list of things they will require to open up the bank account, and should be made aware that the account holders are acting in partnership.
If the partnership consists of a husband and wife then they should both have the power to operate the account. It should be an account that is separate from their personal accounts.
Partnership capital
Often, when a partnership starts, the partners inject their own capital (whether money or other assets) into the partnership to get it going.
The partnership agreement (if there is one) should set out how the partnership capital should be treated and accounted for throughout the life of the partnership.
Trading in joint names and public recognition of the partnership
The parties should promote themselves to the world at large that they are acting in partnership. This is particularly important where one partner may do a large amount of work (for example, where only one partner is a qualified tradesperson). When conducting work for customers, a tradesperson should make it clear that the customer is dealing with a partnership and not simply the individual. All the invoices, business letters, tenders and advertising should be in the partnership name.
Business records
Separate partnership records such as books of accounts, minutes of partnership meetings and so on should be kept. These records should be different from the parties’ personal and other business records.
Splitting profits (or losses)
The basis of splitting profits is generally set out in the partnership agreement.
Generally speaking, only general law partnerships (i.e., business partnerships) deriving income are able to split profits in different proportions to the partner’s underlying interest in the partnership. This means rental property owners and people who jointly invest in shares or interest bearing deposits must pay tax on their share of the profits or losses based on their underlying ownership interest in the jointly owned asset(s).
Entry and retirement of partners
When a new partner is admitted to a partnership or a partner retires from a partnership, the current partnership ceases and generally a new partnership is created (e.g., if the partnership A and B admits new partner C, the partnership of A and B has ceased, and a new partnership of A, B and C has started).
In some circumstances, the ATO does not require the new partnership to obtain a new tax file number or ABN, or for two tax returns to be lodged in the one year. Advice should be sought from your accountant about whether any such exceptions apply.
On the entry and retirement of partners, there are a number of important tax issues including those relating to stamp duty, trading stock, plant and equipment, work-in-progress, GST and capital gains tax.
Changing the partnership agreement
As a general rule, the partnership agreement, or any other term within the partnership agreement, can be changed if all of the partners sign a document with the new terms (including a new partnership agreement). This should not normally have any adverse tax consequences, unless the partners’ interests in the partnership are altered in any way.
Partnership of trusts
A partnership is not an entity – it is merely a form of shared ownership of property and an agreement to share certain benefits and obligations between the people (or other entities) that come together to form the partnership.
A partnership of discretionary trusts is simply a partnership in which each partner is a discretionary trust (actually, each partner is a trustee of a discretionary trust). This is to be contrasted with a normal partnership of individuals. Rather than each individual being a partner in the partnership, each individual’s discretionary trust is the partner.
Due to the complex nature of a partnership of trusts, a partnership of trusts should have a partnership agreement detailing how the partnership is to be run, including the potential appointment of an agent/corporate manager (see below).
The main advantages of a partnership of trusts include:
- Asset protection (although each partner in the partnership is jointly and severally liable for the debts of the partnership, as each partner is a discretionary trust, the personal assets of the individuals are generally protected). This is a distinct advantage over a partnership where the individuals themselves are the partners. Should the business fail, only the assets of the partnership and the partners (being the trusts) will be at risk.
- Fixed interest with flexibility of distributions. Each principal, through their family discretionary trust, has a fixed interest in the capital and income of the partnership. Should there be a dispute or should the business fail, each discretionary trust will be entitled to a share of the profits and capital according to its fixed interest in the partnership. However, the trustee of each trust can distribute the trust’s share of the partnership income among the trust’s beneficiaries in any way it wishes.
- Tax advantages. It is generally easier for tax-free distributions to be made through a partnership of discretionary trusts, as compared to a unit trust or a company. Also, it is generally easier for partners of a partnership of trusts to access the concessional capital gains tax (CGT) treatment provided by the small business CGT concessions than, for example, a unit trust structure.
- Independence. Each partner’s trust is effectively independent of the others (it is even possible to have partners that are not discretionary trusts, but which are unit trusts, or even companies or individuals, although some of the benefits of operating through this type of structure may then be lost).
- Employment benefits. The individual principals can be employed by the partnership and obtain the benefits of salary packaging, employer sponsored superannuation, etc. A partnership of individuals cannot employ the individual partners themselves.
The main disadvantages of a partnership or discretionary trusts are:
- More complex than a normal partnership, and more expensive to set up and operate (especially if each discretionary trust also has a corporate trustee);
- Some external parties may not understand how they operate.
Operating a partnership of discretionary trusts – with or without an agent
Operating a partnership of discretionary trusts is very complex. Although an overview is provided below with respect to some of the issues, we recommend that advice be sought from your accountant in this regard.
Use of an agent/manager
A company agent/manager is sometimes used to act on behalf of the partnership of trusts. This is done predominantly for administrative ease. For example, contracts can then be entered into by the agent, instead of all the partners collectively. Each of the partners would generally have a proportionate number of shares in the company acting as agent and can appoint a director to the agent’s board.
Consider registration for the tax system
Even though a partnership is not legally a separate identity, there are a number of taxes that the partnership may have to register for, including GST, PAYG, and so on. In this regard, advice should be obtained from your accountant.
GST and ABN issues
A partnership of trusts may make supplies and acquisitions. This will either be done by the partnership itself or, if it has an agent acting for it, through the agent.
If there is no agent, the partnership should obtain an ABN and, if it is necessary (i.e., its turnover is above the threshold) or it chooses to do so, register for GST.
However, if there is an agent, the partners will need to decide whether the agent should also obtain an ABN and register for GST. As a general rule, if the partners want the agent to be able to issue tax invoices in its own name, the agent should obtain an ABN. Also, although GST will ordinarily be dealt with in the business activity statements (BASs) of the partnership, they may also want to register the agent for GST so that external parties can simply deal with the agent and have no cause to inquire about the structure behind the agent.
Again, this is a complex area and you should obtain professional advice if you are at all unsure about operating in this area.
Open a bank account
After a partnership agreement has been signed, a partnership bank account should be opened. This will generally be a joint bank account if there is no agent (which may be unwieldy) or alternatively, if there is an agent, the agent can open the bank account in its own name.
Partnership capital
Often, when a partnership starts, the partners inject their own capital (whether money or other assets) into the partnership to get it going.
The partnership agreement (if there is one) should set out how the partnership capital should be treated and accounted for throughout the life of the partnership, including whether legal title in the assets will be held by the agent (if any).
Splitting profits (or losses)
The basis of splitting profits is generally set out in the partnership agreement.
Entry and retirement of partners
A partner trust can sell its interest in the partnership without effecting the tax position of the other partners, although in practice it may be difficult to find someone to buy their interest.
New partners can be admitted easily by simply becoming partners in the partnership, although this may cause tax implications to the existing partners (tax issues include those relating to stamp duty, trading stock, plant and equipment, work-in-progress, GST and CGT). When a new partner is admitted (or an existing partner retires), the current partnership ceases and generally a new partnership is created (e.g., if the partnership A and B admits new partner C, the partnership of A and B has ceased, and a new partnership of A,B and C has started).
In some circumstances, the ATO does not require the new partnership to obtain a new tax file number or for two tax returns to be lodged in one year. Advice should be sought from your accountant about whether any such exceptions apply.
Changing the partnership agreement
As a general rule, the partnership agreement, or any term within the partnership agreement, can be changed if all the partners sign a document with the new terms (including a new partnership agreement). This should not normally have any adverse tax consequences, unless the partners’ interests in the partnership are altered in any way.
Company
A company effectively allows persons to come together for a particular enterprise, and the ownership and the management of the entity can then be split between the members/shareholders (the owners) and the directors (who manage the enterprise undertaken by the company), although it is now possible for a company to have a sole shareholder who is also the sole director.
The company itself is a separate legal entity, which means that the liability of the shareholders for any actions of the company is limited. That is, the personal assets of the shareholders are not exposed due to any actions of the company – the only assets the shareholders may lose if the company “goes under” are the shares themselves.
Most companies are private companies (or ‘proprietary companies’), with the words Pty Ltd” (or the equivalent) at the end of the company name. A proprietary company (as opposed to a public company) must have no more than 50 non-employee shareholders, and cannot issue a prospectus to issue shares to, and obtain funds from, the general public.
A company derives its existence from, and needs to be registered under, the Corporations Act 2001 (the Act). The internal management of the company, including the rights, duties and powers of the shareholders and directors, are also governed by the Act, as well as by the constitution of the company (referred to in the past as ‘memorandum and articles association’). If a proprietary company has a constitution, it must be kept with the company’s records so it is available if required, but it does not have to be lodged with the Australian Securities & Investment Commission (ASIC) (a public company must lodge its constitution with ASIC when applying to register the company). Companies without a constitution may be able to rely on the “replaceable rules” in the Act.
Advantages of a company include:
- Asset Protection
- 30% tax rate (including on any accumulated income – company income can be paid out as dividends or salary, but does not need to be)
- External parties are generally comfortable (or prefer) dealing with a company
Disadvantages of a company include:
- More complex to operate than some other structures, and complex tax rules apply;
- Some CGT concessions not available, or tougher to access.
Operating a company
There are a number of important issues to consider in relation to operating a company, including the following.
Consider registration for the tax system
There are a number of taxes that the company may have to register for (via the trustee), including GST, PAYG and so on. In this regard, advice should be obtained from your accountant.
Display company name and ACN/ABN
The directors should ensure that the company name is displayed at every place at which the company carries on business and that is open to the public, as well as on the common seal (if the company has one), every public document of the company, every negotiable instrument (e.g. cheque, promissory note etc.) of the company and all documents lodged with ASIC (along with their ACN or ABN).
Open up a bank account
The directors should arrange for a bank account to be set up after the company has been set up. The bank can provide details of the information required to open up a bank account.
It should be remembered that the money in the company’s bank account belongs to the company, not to the directors or shareholders. In fact, there can be very serious tax consequences if the shareholders (or their associates) use their company’s money or assets for personal reasons.
Record keeping
The company must keep proper financial records, as well as other records, such as minutes of shareholder and director meetings. As the company is an entity separate from the shareholders and directors, the minutes (or other written words) provide evidence of the decisions made and actions taken by the company.
Directors’ (and company secretary) duties
Directors acting together constitute the board of the company and are responsible for the actions of the company, even if they appoint an agent to look after the company’s affairs.
A company secretary generally carries out administrative roles for the company but is also held to the same standards as the directors. Proprietary companies are not required to have a secretary.
The directors are responsible for managing the company, and must act for the benefit of the company. The interests of the company must always come first (even though they may have set up the company just for personal or taxation reasons).
Directors have many responsibilities but some of their duties include that they must be honest and careful at all times, retain their independence and not act in accordance with the wishes or directions of a third party or parties, disclose personal interests that might conflict with their duties as a director (and, if necessary, refrain from voting on or otherwise participating in board discussions about a matter where a conflict of interest exists), and stop their company trading if it is unable to meet its existing debts as an when they fall due.
Changing directors
The shareholders will normally have the power to appoint and remove directors at shareholder meetings. ASIC needs to be notified of a change to the directors (or secretary).
Changing shareholders
The transfer of shares in a company must normally be done in accordance with the constitution of the company. Often this will require a transfer of shares form to be executed, and various changes made to the company register. Sometimes the approval of certain entities may need to be sought (e.g., the directors, or other shareholders). Whether or not the shares are transferred for any consideration, there may also be CGT/stamp duty consequences. In addition, ASIC needs to be notified of the change.
Changing the constitution
Changes to a constitution (or even the complete replacement of a constitution) can normally be made by a special resolution of the shareholders. ASIC does not need to be notified of a change to the constitution of a proprietary limited company.
ASIC
ASIC considers itself the “company law watchdog” and is responsible for administering and overseeing the corporations law regime and the companies (and their directors) that are a part of it.
The company must pay to ASIC the company’s annual review fee each year, and must also keep ASIC informed of various changes to the company’s details (such as changes of directors or their details, the issue of new shares or a change in the company’s name) within the required time period.
Company name vs Business name registration
A company registered under the Act is an Australian company, and can conduct business throughout Australia without needing to registrar in individual State and Territory jurisdictions. Businesses that are not companies (e.g., sole traders and partnerships) are required to register their business name with the appropriate State/Territory unless the business is conducted under the name of the person or persons involved. Also, a business name is a consumer protection measure and has no legal status. Registration or use of a business name does not create a separate legal entity and does not allow the use of privileges to which a company is entitled (such as a corporate tax rate or limited liability).
It should be noted that, even if ASIC has registered a company with a particular name, a person or corporation with a similar registered name may still take action against the company; e.g., if they believe the similarity of the names is causing confusion in the marketplace.
Unit Trust
A trust is a relationship where a person (the trustee) is under an obligation to hold property for the benefit of other persons (the beneficiaries). It is not a separate legal entity (although for the tax law purposes, a trust tax return is required to be lodged). The terms of the true relationship are contained within a ‘trust deed” (although some State and Commonwealth legislation can also affect trusts).
A trust cannot exist forever. The trust comes to an end on the “Vesting Day”. In most States and Territories the trust must end within 80 years of the establishment date.
What is a unit trust?
A unit trust is a trust in which the trust property is divided into a number of defined shares called units. Most unit trusts are established by the subscription; that is, the initial unit holders (the “subscribers”) subscribe for units in the unit trust paying a set amount for each unit to the trustee and, in return, the trustee issues those subscribers with the requisite number of units, much like shareholders applying for shares in a company. A unit trust is really just a means of describing the share in the trust fund to which the unit holder is entitled.
The assets of the trust, being the trust fund, are held by the trustee(s) on trust for the unit holders (the beneficiaries of the unit trust), who generally are entitled to the capital and income of the trust fund in proportion to their holding units (though this will depend on the trust deed and the type of units held). Like shares in a company, these units can generally also be easily transferred, or even re-acquired (or ‘redeemed’) by the trustee.
Other benefits of a unit trust include the following:
- Less regulation than a company;
- Taxation advantages over a company (in some cases); and
- Easier to wind up than a company
However, as compared to a discretionary trust, a unit trust does not offer the same sort of flexibility or asset protection (as the units themselves are an asset of a unit holder and could become available to creditors of that unit holder, unlike with a discretionary beneficiary of a discretionary trust).
How is a unit trust established?
A unit trust by subscription is created when the unit holders subscribe for units in the trust, and execute (i.e., sign and date) the trust deed. The parties to the trust deed of a unit trust by subscription will be the trustee and the subscribers or initial unit holders.
A trust deed in usually subject to stamp duty (except in Queensland). The stamp duty varies from one State to another, and the deed normally needs to be stamped within 90 days/3 months of being executed.
The trustee(s)
The trustee is the legal owner of the trust property, and is responsible for managing the trust fund on behalf of the beneficiaries (who are the beneficial owners of the trust fund). Being the legal owner, all of the transactions of the trust are carried out in the name of the trustee. The trustee signs all documents for and on behalf of the trust i.e., in its capacity as trustee of the trust.
As a trust is not a separate legal entity, the trustee bears the duties and responsibilities in relation to the trust. As such, the trustee is personally liable to creditors and accountable to beneficiaries.
A corporate trustee generally offers greater protection than an individual being the trustee, so, where possible, a company should be the trustee.
There are many duties imposed on the trustee by law. The trustee’s overriding duty is to obey the terms of the trust deed, but it also has a duty to act in the best interests of the beneficiaries and in good faith, it must exercise reasonable care in the administration of the trust, must not benefit from the position of trustee (unless authorised), and must keep proper accounts and records.
In addition to a trustee’s duties, which the trustee must carry out, the trustee also has the choice to use “powers”. Powers under many trust deeds include the power to buy assets, dispose of them at any time, and mortgage assets for the purposes of undertaking borrowings, and so on.
If a trustee becomes liable for an expense as a result of the proper exercise of their powers and duties, the trustee can generally be “indemnified” out of the trust assets (meaning the trustee can pay expenses from trust funds, instead of their own (although, if the assets of the trust fund are insufficient to meet the expenses, the trustee may be personally required to pay for such expenses, which is one reason why a company is preferred as trustee)).
Operating a trust
There are a number of important issues to consider in relation to operating a trust, including the following.
Consider registration for the tax system
There are a number of taxes that the trust may have to register for (via the trustee), including GST, PAYG and so on. In this regard, advice should be obtained from your accountant.
Open up a bank account
After the deed is executed, the trustee should arrange for a bank account to be set up as soon as possible. The name of the bank account should be something like “ABC Pty Ltd as trustee for the Smith Unit Trust”. The bank can provide details of the information required to open up a bank account.
It should be remembered that the money in the trust’s bank account should be managed by the trustee in accordance with the terms of the trust deed. – i.e., it should not be used as a personal bank account by the trustee or beneficiaries.
Investments
Trustees generally have unlimited powers in deciding in what to invest. The trustee’s powers are set out in the trust deed, but the trustee has a responsibility to exercise skill and care in making their investment decisions. This rule basically says that the trustee should ensure they take the same degree of care that a prudent person would take in making investment decisions, given their skills and knowledge. The assets of the trust belong to the trust, not to the beneficiaries/unit holders, so they can’t deal with those assets in their wills, for example.
Changing the trustee
Generally speaking, the unit holders are able to appoint and remove the trustee (often through a special resolution, being a resolution passed by unit holders holding at least 75% of the units).
Changing the trust deed
As a general rule, very minor changes can be made to the trust deed by the trustee (possibly with the consent of another party such as the appointor) executing a further deed of variation with no adverse tax consequences. However, large changes could lead to a new trust arising or being “resettled” (meaning a new trust comes into existence), leading to large CGT and stamp duty liabilities. Expert advice should be sought before any change is made to a trust deed.
Discretionary trust
A trust is a relationship where a person (the trustee) is under an obligation to hold property for the benefit of other persons (the beneficiaries). It is not a separate legal entity (although, for tax law purposes, a trust tax return is required to be lodged). The terms of the trust relationship are contained with a “trust deed” (although some State and Commonwealth legislation can also affect trusts).
A trust cannot exist forever. The trust comes to an end on the “Vesting Day”. In many States and Territories the trust must end within 80 years of the establishment date.
What is a discretionary trust?
A discretionary trust is generally a trust under which the distribution of income or capital to beneficiaries is made at the discretion of the trustee. Until the trustee exercises its discretion, the beneficiaries generally have no interest in the property (or income) of the trust.
In practice, discretionary trusts have a very wide range of potential beneficiaries, usually determined by their relationship to one of more specified persons (e.g., the spouses, children, parents, grandparents, brother, sisters, aunts, uncles, cousins, etc of the “primary” (named) beneficiaries, as well as related companies, trusts and other entities, and various charities).
No beneficiary has any claim to any assets of the trust unless and until the trustee makes a distribution of income (or a trust asset) in their favour.
The benefits of a discretionary trust include the following:
- Potential asset protection (especially if the trust has a corporate trustee);
- The trustee has flexibility regarding the distribution of income and capital;
- Less regulation than company
- The trust deed can be tailored to the needs of principals and beneficiaries;
- Easier to wind up than a company.
How is a discretionary trust established?
A discretionary trust is created when a person known as the “settlor” gives the trustee money (e.g.,$20) or property to hold for the benefit of the beneficiaries under the terms of the trust deed (which will be executed (i.e., signed and dated) by both the seller and the trustee at the same time). This “settled sum” is the original trust fund, though other assets can be added to or acquired by the trustee after it has been set up. The settlor is normally a family friend and should be independent from the persons establishing the trust. No other legal obligations arise for the settlor, who is not responsible in any way for the trustee’s actions.
A trust deed is usually subject to stamp duty (except in Queensland). The stamp duty varies from one State to another, and the deed normally needs to be stamped within 90 days/3 months of being executed.
The trustee(s)
The trustee is the legal owner of the trust property, and is responsible for managing the trust fund on behalf of the beneficiaries. Being the legal owner, all of the transactions of the trust are carried out in the name of the trustee. The trustee signs all documents for and on behalf of the trust i.e., in its capacity as trustee of the trust.
As a trust is not a separate legal entity, the trustee bears the duties and responsibilities in relation to the trust. As such, the trustee is personally liable to creditors and accountable to beneficiaries. A corporate trustee generally offers greater protection than an individual being the trustee.
There are many duties imposed on the trustee by law. The trustee’s overriding duty is to obey the terms of the trust deed, but it also has a duty to act in the best interests of the beneficiaries and in good faith, it must exercise reasonable care in the administration of the trust, must not benefit from the position of trustee (unless authorised), and must keep proper accounts and records.
In addition to a trustee’s duties, which the trustee must carry out, the trustee also has the choice to use “powers”. Powers under many trust deeds include the power to buy assets, dispose of them at any time, and mortgage assets for the purposes of undertaking borrowings, and so on.
If a trustee becomes liable for an expense as a result of the proper exercise of their powers and duties, the trustee can generally be “indemnified” out of the trust assets (meaning the trustee can pay expenses from trust funds, instead of their own (although, if the assets of the trust fund are insufficient to meet the expenses, the trustee may be personally required to pay for such expenses, which is one reason why a company is preferred as trustee)).
Operating a trust
There are a number of important issues to consider in relation to operating a trust, including the following.
Consider registration for the tax system
There are a number of taxes that the trust may have to register for (via the trustee), including GST, PAYG and so on. In this regard, advice should be obtained from your accountant.
Open up a bank account
After the deed is executed, the trustee should arrange for a bank account to be set up as soon as possible. The name of the bank account should be something like “ABC Pty Ltd as trustee for the Smith Discretionary Trust”. The bank can provide details of the information required to open up a bank account.
It should be remembered that the money in the trust’s bank account should be managed by the trustee in accordance with the terms of the trust deed. – i.e., it should not be used as a personal bank account by the trustee or beneficiaries.
Investments
Trustees generally have unlimited powers in deciding in what to invest. The trustee’s powers are set out in the trust deed, but the trustee has a responsibility to exercise skill and care in making their investment decisions – i.e., the trustee should ensure they take the same degree of care that a prudent person would take in making investment decisions, given their skills and knowledge. The assets of the trust belong to the trust, not to the beneficiaries, so they can’t deal with those assets in their wills, for example.
Minutes for annual income distribution
As well as maintaining records it is important that the trustee holds a meeting (or otherwise resolves under the trust deed – e.g., by signing a written resolution) on or before 30 June each year to allocate the trust income among the beneficiaries (otherwise the trustee may be taxed on the income at 46.5%).
Changing the trustee
The appointor(s) named in the trust deed have the power to appoint and remove trustees, meaning they effectively have the real power and control over the assets of a trust. In most cases, the original appointors include the parties for whose benefit the trust is established. The deed should also set out the process for changes in appointors to be made (especially if an appoint dies or is made bankrupt).
For ultimate asset protection, it is recommended to have joint appointors with at least one independent appointor. For example, three joint appointors, being the husband and wife and an independent appointer such as a family solicitor or accountant. To be effective, the appointors’ decisions must be unanimous (thus two could not act against one).
If there is no appointor named in the trust deed, then reference should be made to the Trustee Act of the State or Territory concerned.
Changing the trust deed
As a general rule, very minor changes can be made to the trust deed by the trustee (possibly with the consent of another party such as the appointor) executing a further deed of variation with no adverse tax consequences. However, big changes, or any changes to the beneficiaries of the trust, could lead to a new trust arising or being “resettled” (meaning a new trust comes into existence), leading to large CGT and stamp duty liabilities. Expert advice should be sought before any change is made to a trust deed.
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