Most practitioners will have noticed that almost all modern trust deeds prohibit the settlor from receiving any distributions, or benefit from the trust. Generally speaking, amending the trust deed to remove that prohibition is also out of the question.
While there is nothing preventing the settlor of a trust from also being a beneficiary, having the settlor named as a beneficiary where the trust deed prohibits distributions to the settlor, can mean invalid distributions. This results in the trust having undistributed income which is assessable to the trustee at the top marginal rate.
It's good practice to exclude the settlor of a trust from being a beneficiary to avoid the adverse consequences of section 102 of ITAA 1936, which allows the ATO to assess tax on the trustee of a revocable trust. This means the trustee may be assessed on all trust income rather than the beneficiaries if:
This is, of course, the reason that modern trusts have a settlor who is entirely unconnected to the beneficiaries and who is specifically excluded from receiving any benefit from the trust. For example, Acis uses an independent company called Acis Settlements Pty Ltd. The exclusion of the settlor means, where a beneficiary is named as settlor, that person cannot receive distributions.
It has generally been considered that a person who donates further property to an existing trust is not a settlor (or creator) of a separate trust which would trigger section 102. Some trust deeds, however, also exclude notional settlors from being beneficiaries for the same reasons as the original settlor is excluded.
Where notional settlors are excluded, a potential beneficiary may not be able to receive distributions if, for example
Difficulties arise because it is highly likely that the persons intended to primarily benefit from the trust will have made such loans or transferred or gifted assets to the trust. This raises a significant risk of invalid distributions being made. For example:
If the trust deed contains valid default distribution provisions, these may save the situation by deeming the undistributed income to be paid to the default beneficiaries; however, in many cases the default beneficiaries will be the same person or persons.
Where a notional settlor provision exists in a trust deed, the trust deed should be amended to remove the restriction although many such deeds will also prohibit the amendment of the deed to permit a notional settlor to benefit.
Please contact Stephen Harvey to discuss your questions, or if you have a trust deed which contains a notional settlor exclusion.