Why Risk It?

Stephen Harvey, current as of: 10 December 2014.

If you stop and think, can you recall the last time your clients’ trust deeds were reviewed?

With firms exposing themselves and their clients to damaging fallout from outdated or flawed trust deeds, regular reviews are necessary to dodge this bullet.

A review achieves the following:

  • Reinforces the ongoing obligation to read each trust deed;
  • Deeds are considered each year in light of changing circumstances, and the need to make effective trust distributions; and
  • Highlights the benefits of having all trusts use similar or standardised terms to help reduce the time taken to review them each year.

It makes sense that, if a good proportion of your revenues rely on compliant business structures, you make the time to take a good look at whether your deeds are up-to-date.

A potential tidal wave

In recent years, the Commissioner has taken a more aggressive approach to trusts and is focused on ensuring they are working within the rules. Given the government’s current budgetary issues, this is unlikely to change anytime soon.

Recent decisions (think Bamford in 2010) have focused the Commissioner’s attention firmly on compliance and accuracy. The rise in commoditised, technology-based providers of business structures has resulted in a failure on both scores.

In the chase to increase market share and reduce prices, professional scrutiny of trust deeds is often regarded as a luxury rather than a necessity. 

Don’t risk having clients reassessed or penalised for a failure to scrutinise their trust deeds.

What risk looks like

Trust Settlor also the Primary Beneficiary

Some document providers’ automated systems permit the Settlor of the trust to also be named as the Primary Beneficiary. This is potentially disastrous, as it runs the risk that the person who is primarily intended to benefit from the trust will be unable to receive distributions, and any distributions that are made in ignorance of the prohibitions against doing so, will lead to reassessments of tax and possibly additional penalties.

No tax-effective income distribution

Trust deeds which do not contain modern income provisions will rob the trust of the ability to carry out critical tax planning and distribute income in a tax-effective way. Many new and supposedly modern deeds fail on this score.

Using an incorrect type of trust

Advisers may fail to appreciate the distinction between a fixed unit trust and a non-fixed unit trust. This failure can have significant adverse consequences, and lead to higher than necessary tax liabilities (including land tax, in some states). It can also result in the denial of claims for deductions or claims for access to franking credits.

Risk has two faces

A simple assessment of your clients’ trust deeds will enable you to determine if you are facing one or both of the two faces of risk:

  1. Was flawed data provided to establish the trust? This is not uncommon given the amount of information required to establish the structure. Automated systems or document templates simply can’t compensate for, or protect against, human error.
  2. Has a professional scrutinised and updated the deed? If the deed is not scrutinised at the outset, and regularly reviewed to ensure its ongoing compliance, the risk of failure increases.

It’s very simply a case of reducing the risk by assessing, understanding and mitigating against discrepancies which may cost you and your clients dearly.

To assist you in assessing your clients’ trust deeds, a full copy of our Discretionary Trust Checklist is available here. If you have any queries in relation to this, please contact us toll-free on 1800 773 477.

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