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Trusts, foundations and charities

Trusts

Are trusts legally recognised in your jurisdiction? If so, what types are available and most commonly used?

  • Trustees of trust entities are recognised as legal entities in Australia. While trusts themselves are recognised as a relationship rather than a legal entity, they are treated as taxpayers for the purposes of tax administration.
  • The main division in the types of trust is in the method of determining the entitlement of beneficiaries. Trusts can be either discretionary or fixed. In discretionary trusts, the distribution of the trusts income or capital to beneficiaries is at the discretion of the trustee. For fixed trusts, the distribution of income and capital to beneficiaries is predetermined by the trust deed.
  • Fixed trusts can have the entitlements of beneficiaries determined by units that are issued by the trust, in which case the trust is referred to as a unit trust.
  • Discretionary trusts are the most common type of trust as they can be adapted to serve a number of different purposes.
  • One of the common forms of discretionary trust is generally known as a family trust, which has the purpose of providing protection for the assets of a family group and allowing for the sharing of income. The trustee of a family trust can make an election to the Australian Taxation Office and if the trust passes the family trust tests, then it will be eligible to access a number of tax concessions.

What rules and procedures govern the establishment and maintenance of trusts?

  • In Australia each state has its own legislation that governs the establishment and maintenance of trusts.
  • All Australian states with the exception of South Australia have a restriction on the period that a trust may exist. This restriction prevents a trust from existing for over 80 years.

How are trusts taxed in your jurisdiction?

Where a trust has distributed all of the income that it has earned during the taxation year to eligible beneficiaries, then the income will be taxed in the tax returns of beneficiaries. If there is income that has not been distributed or has been distributed to a beneficiary that is ineligible, the trustee of the trust will be assessed on the income at the highest marginal rate for individuals ($0.47 per $1).

If trust income has been distributed to a minor, a person under a legal disability or a non-resident, then the trustee of the trust will be obligated to pay tax on behalf of the beneficiary.

Foundations and charities

Are foundations and charities legally recognised in your jurisdiction? If so, what forms can they take?

  • Foundations and charities are legally recognised in Australia. They may be formed using a number of different entities such as trusts, corporations and incorporated on non-incorporated associations.
  • In order for an organisation to be recognised as a charity it must be:
    • not for profit;
    • for a charitable purpose; and
    • for the public benefit (where the charitable purpose is not for the relief of poverty).
  • The charitable purpose must meet one of the definitions of ‘charitable purpose’ stated in the Charities Act 2013 (Cth), which include:
    • the purpose of advancing health;
    • the purpose of advancing education;
    • the purpose of advancing culture; and
    • the purpose of advancing the security or safety of Australia or the Australian public.

What rules and procedures govern the establishment and maintenance of foundations and charities?

Depending on the type of entity that is used to run the charity, different rules or legislation will govern how the entity is operated, and the duties and obligations of the person that runs the entity. Trusts will be governed by legislation based in the state in which it was established and corporations will be subject to the federal Corporations Act 2001.

The activities and function of the charity will be governed by the federal Charities Act 2013. They may also be subject to additional legislation or regulations depending on the state in which the charity or foundation was established or operates.

How are foundations and charities taxed?

  • Charities will be taxed based on how the underlying entity running the charity is taxed. In order for the charity to be given taxation concessions, it is required to be registered with the Australian Charities and Not for Profits Commission (ACNC). 
  • Upon registration, the ACNC will send the charity’s application for taxation concessions to the Australian Taxation Office, which will determine the concessions for which the charity will be eligible. The taxation concessions that may apply to a charity are:
    • income tax exemptions and franking credit refunds – the charity will be exempt from paying income tax and may be eligible to receive refunds of franking credits on dividend income that it receives;
    • goods and services tax concession; and
    • fringe benefits tax rebates.
  • The charity or foundation may also apply to become a deductible gift recipient; this allows the donations made to the charity to be used as a tax deduction in the income tax return of the donator.

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