Being involved with private trusts

Last updated: 
17 January 2020

This page explains how your involvement with a private trust, as an appointor, trustee or beneficiary may affect your rate of income support pension or payment under the income and assets tests. If you are the controller of a private trust, the income and assets of that entity may be assessable for pension or payment purposes.

What is a trust?

A trust is an obligation binding a person (the trustee) to hold property for the benefit of persons (the beneficiaries). A trustee may be a person or a company. The trustee is required to use any property belonging to the trust for the good of the beneficiaries, not for his or her own purposes. In some cases though, the trustee may also be a beneficiary of the trust and a contributor to the property held by the trust.

What is a private trust?

A designated private trust is a trust that includes family trusts, testamentary trusts and those fixed trusts with fewer than 50 members. This includes overseas trusts.

The definition of designated private trusts does not include fixed trusts with more than 50 members; self-managed superannuation funds or any public trusts, such as unlisted property trusts or equity trusts.

Involvement in a private trust

A person is involved in a private trust if they or their partner:

  • are the appointor, guardian or principal of the trust;
  • are a trustee;
  • are a shareholder or director of the trustee company;
  • are a beneficiary included among the categories of beneficiaries;
  • are a unit holder;
  • are owed money by the trust;
  • have provided, for less than market value, property or services to the trust since
    9 May 2000;
  • are able to benefit from the trust; or
  • can expect the trustee or appointor of a trust to act in accordance with their wishes.

What is a direct benefit?

A person may enjoy a direct benefit from a private trust by, for example, having the trust pay all their personal living expenses or using the trust assets as if they were their own personal assets.

What is an indirect benefit?

A person may enjoy an indirect benefit from a private trust by, for example, having access to, and use of, trust assets such as holiday homes.

What is attribution?

From 1 January 2002, the assets and income of a private trust may be attributed to a person based on:

  • the Control Test - control includes control via an associate; and
  • the Source Test – where a person transfers assets or services to a trust after 7:30pm Australian Eastern Standard Time (AEST) on 9 May 2000.

Considerations determining attribution

Some of the considerations for deciding attribution of income and assets include:

  • the strength of control available to be exercised in theory;
  • the exercise of control in practice;
  • whether any contributions have been made to the private trust and their size in relation to the value of the assets of the entity;
  • the scope of controller(s) to benefit from distributions;
  • the history of distributions of capital and income from the entity;
  • the use and enjoyment of the assets or income of the entity;
  • any pre-existing attributions as determined by Centrelink or the Department of Veterans’ Affairs (DVA); and
  • any other fact or circumstance related to the activities or administration of the private trust which, in the opinion of the Repatriation Commission (for service pension, income support supplement and veteran payment) or Secretary (for age pension), should be taken into account.

If a person is attributed with the assets and income of the private trust, those assets and income will be treated as if they are the person’s assets and income.

The control test

The control test is broad and covers formal control as well as informal control via an associate. Although a trustee often undertakes the day to day management of a trust, effective control of a trust generally rests with a person who can:

  • dismiss and appoint a trustee;
  • veto a trustee’s decision; or
  • change the trust deed.

This person could be the appointor, principal or guardian. The trustee of a trust may also hold some of these powers. A person may also control a trust by being able to influence the trustee to act in their favour, or where the trustee could be expected to act in accordance with their wishes.

The source test

The source test can only apply where assets or services are transferred to a trust after 7:30pm (AEST) on 9 May 2000.

Under the source test, a person may be regarded as a controller:

  • if the person transfers, or has transferred, assets to the structure whether directly or indirectly, for inadequate consideration; or
  • if the person provides, or has provided, services to the structure for inadequate remuneration.

The source test recognises that persons, who transfer assets or services to a private trust and do not receive adequate consideration in return, generally retain some means of control.

Testamentary trusts

It is important to note that special rules apply to testamentary trusts.

If a testamentary trust is activated as a result of a person's partner dying on or before 31 March 2001, the trust assets and income would generally be attributed to the formal controller.

If the trust is being administered for the benefit of the surviving partner and if the surviving partner is exercising informal control, attribution will be to that partner.

Where a testamentary trust is activated as a result of a person's partner dying after 31 March 2001, the surviving partner will be attributed with the assets and income of the trust if:

  • the surviving spouse directly controls the trust, or
  • an associate has control and the surviving spouse is a potential beneficiary.

Relinquishing control of a private trust

A genuine resignation from a private trust is accepted by DVA as having occurred where both the controller and their partner:

  • relinquish all formal roles and control in respect of the trust;
  • make a written declaration that they will not exert any control over, or benefit in any way, from the trust; and
  • relinquish all beneficial interest in the trust.

If you relinquish control of a private trust, you will be considered to have gifted the assets held by the trust. Gifts may be assessed for 5 years from the date of transfer.

A special concession for primary production trusts allows some primary producers to retain limited appointorship powers. It should be noted however that under limited appointorship arrangements made on or after 1 January 2002, gifting rules will apply. It is therefore important that the appointor seek professional advice before making any changes.

For more information about the concession refer to DVA Form D0605 Application for special concession Primary producer-private trusts.

Relinquishing all formal roles and control

This means resigning as the appointer and/or trustee of the trust by amending the trust deed.

Making a written declaration

The following is an acceptable form of words for a written declaration.

I/We [your and/or your partner’s name] of [address] declare that I/we will not exert any control over, or benefit directly or indirectly in any way from the [name of the trust].

*Note: - It is important to always seek independent advice about the possible taxation implications of relinquishing control of a trust.

Relinquishing all beneficial interest

This requirement can be satisfied by:

  • changing the trust deed to remove yourself and/or your partner as beneficiaries of the trust; or
  • creating a separate deed to renounce the beneficial interest of yourself and/or your partner.

The following is an acceptable form of words for the additional deed to give up beneficial interest.

I/We (the trustee/s) recognise the renunciation of [your and/or your partner’s names if you are the beneficiaries] as a beneficiary of the trust, and will honour it as irrevocable and will exclude [yours and/or your partner’s names if you are the beneficiaries] from any income or capital distribution or the receipt of any other benefit.

Stamping the amended trust deed

Most trust deed amendments are required to be stamped by the relevant state authority. Where stamping is required, you must provide a stamped copy of the amendment to DVA.

Where the amendment does not need to be stamped, you must provide:

  • a copy of the amendment; and
  • a letter from a solicitor stating that they arranged the amendments and stamping was not required.

Corporate trustee

A corporate trustee exists when a company is the trustee of a trust.

If this is the case:

  • you and/or your partner must relinquish all shares and directorships in the company; and
  • make a written declaration that you will not exert any control over, or benefit in any way from the company.

Exerting control

DVA must be satisfied that you and/or your partner are not exerting any informal control over the trust. Where you and/or your partner continue to exert informal control over the trust, it will not be accepted that control has been relinquished.

Examples of situations that may indicate continued control by the resigning controller are:

  • ongoing use and enjoyment of trust assets, apart from retaining a life interest in the home; or
  • leaseback arrangements; or
  • substantial loans still owed by the trust to the resigning controller.

Attributable stakeholder

If a person controls a private trust, he/she is the attributable stakeholder of the trust.

Private trust assets

An asset of a private trust is any asset (excluding exempt assets), whether fixed or financial that the entity owns. The value of the assets (including shares and managed investments) of a private trust is determined by the current market value.

Special provisions apply where a person other than the attributable stakeholder has injected equity capital into a private trust whose investment is regarded as being a “genuine” injection of funds.

Where the principal place of residence of the attributable stakeholder is included in the trust’s assets it will not be an assessable asset if the attributable stakeholder has reasonable security of tenure.

Private trust income

The assessable income of a private trust will be the trust’s profit and loss figure, with certain adjustments. Reasonable expenses associated with the running of a trust will be excluded.

Non-allowable deductions from the income of a private trust include but may not be limited to the following:

  • prior year losses;
  • offsetting losses from unrelated businesses;
  • building depreciation;
  • borrowing expenses;
  • contributions to complying (as per the SIS Act 1993) personal superannuation funds in excess of the superannuation guarantee;
  • contributions to non-complying (as per the SIS Act 1993) superannuation;
  • donations;
  • income equalisation deposits/farm management bonds;
  • double wool clip;
  • forced disposal of livestock;
  • trading stock valuation adjustments;
  • premiums for personal life insurance policies or funds;
  • private health insurance premiums;
  • obsolescence;
  • industry concessions/incentives;
  • amortisation of intangible assets;
  • provisions to defer taxation;
  • capital expenditure deductions;
  • entertainment; and
  • deductions for research and development.

Distributions of income

Distributions paid to an attributable stakeholder (the controller) by the trust will not be double counted. Distributions of income to a non-attributable stakeholder will generally be assessed as a gift by the controller of the private trust. If the non-attributable stakeholder receives an income support payment from DVA or Centrelink such a distribution is assessed as income for 12 months from the date of receipt.

Distributions of capital

Distributions of the capital of a private trust to an attributable stakeholder will NOT be assessed as income unless it is in excess of the attributable stakeholder’s attribution percentage. Excess amounts will be assessed as income for 12 months.

If a capital distribution is less than the attribution percentage, deprivation may result.

Distributions of capital to a non-attributable stakeholder will be assessed as a gift by the attributable stakeholder, and as income for 12 months from the date of receipt for the non-attributable stakeholder.

Information about your private trust

You should note that where an income support recipient is attributed with the income and assets of a private trust, the trust will be reviewed annually. DVA will require you to provide the latest trust related information and documentation. The primary sources of information are:

  • tax return and assessment notice
  • profit and loss statement
  • balance sheet
  • depreciation schedule.

In certain cases a valuation of business assets may be done by a DVA licensed Valuer.

Obligations

When you are granted an income support pension or payment and periodically after that, you will be notified of your obligations. You will be required to tell us within 14 days (28 days if you live overseas or receive remote area allowance) of changes to your circumstances that might affect the rate of income support pension or payment you receive or your eligibility to receive that pension or payment. These obligations apply equally to trustees.

In relation to your private trust, the sorts of things you would need to tell us about within 14 days (28 days if you live overseas or receive remote area allowance) are as follows:

  • you create a private trust
  • you wind up or resign from a private trust
  • you become a trustee, beneficiary, principal, guardian or appointor of a private trust
  • there is any significant change to the private trust.

Usually an overpayment of pension or payment will not occur when you have met your obligations. However, sometimes even if you have met your obligations, an overpayment can occur because we have not been able to process the change before the next payday. We do our best to prevent this occurring, but it is not always possible. To provide you with your exact entitlement we are obliged to recover overpayments of pension or payment where they do occur.

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