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|Acknowledgement of Trust Deed – ‘AFTER the Trustee buys’|
|Declaration of Trust BEFORE you buy – ‘secretly buy’|
What is the difference between a “Bare Trust” and a “Trust”?
Here is an example of a ‘trust’:
- When your son is born you open a bank account (in trust) for him.
- You are the Trustee. The trust’s beneficiary is your son.
- You hold the bank account in trust for your son.
- Trustee: Your name appears on the bank account. But merely as the ‘legal owner’.
- Beneficiary: The ‘true’ or ‘beneficial’ owner is your son. For example, it is your son that pays tax on the bank account interest.
- Trust Asset: the money in the bank account
- A trust’s existence requires 3 things: Trustee, Beneficiary and Trust Assets.
- When your son is 18 years of age he can remove you as Trustee. And instead, replace you with another Trustee. Or he can just make himself the ‘legal owner’:
- Your son, at 18, walks into the bank and directs the bank to change the name of the account from your name to his name.
- At that exact moment in time, the trust ceases to exist.
- This is because the trust no longer has those 3 requirements of a trust.
- When your son (as the sole beneficiary) takes legal ownership of the asset the trust ceases to exist.
Beneficiaries of trusts are protected if the Trustee goes bankrupt
The bank account is preserved for your son, who, as beneficiary, is the ‘true’ owner of the asset. The courts and the ATO ‘look through’ the trust to see who the ‘true’ owner of the assets are. In this case, the ‘true’ owner is your son – not you.
Legal vs beneficiary ownership – the essence of a trust
Most people when they own an asset hold both the legal and beneficial interest in the asset. There is no trust if you hold both the legal and beneficial ownership. In contrast, in a trust the legal and beneficial interests are held by different people:
- One person is the legal owner – trustee.
- The other person is the beneficial owner – beneficiary.
A trust automatically exists when you separate the ‘legal’ and ‘beneficial’ ownership.
If your son, at 18, removes you as the Trustee and puts himself in as the legal owner, then the trust is finished. It is extinguished. This is because your son now holds both the ‘legal’ title and ‘beneficial’ interest. The split of the ownership has gone. The trust relationship no longer exists.
After the Trustee and Beneficiary, the third requirement for a trust to exist are the Trust Assets.
The trust assets can be anything. Trust assets may be real estate, shares, artwork, cars, bank accounts and cash.
Australia’s four types of trusts: Discretionary, Unit, SMSF and Bare Trusts
The four most common trusts in Australia are:
Trustee vs a ‘Bare Trustee’
A trustee who has no discretion and whose only active duty is to convey the property at the direction of the
beneficiary or beneficiaries is a “bare trustee”. See Gummow J in Herdegen v Federal Commissioner of Taxation (1988) 84 ALR 271, 37.
Can one Bare Trustee (one Bare Trust document) hold the assets ( for more than one unrelated Beneficiary?
Yes, a Bare Trust can hold an asset for more than one beneficiary.
E.g. 14,000 BHP shares for John Smith, Mary Smith and Smith Nominees Pty Ltd.
However, the problem is how many shares does John own? How many does Mary own? And how many does the company own? You would need to have a minute setting out the number of shares each of those three persons own. Or prepare 3 separate Bare Trusts.
A Bare Trust is the relationship between the trustee and the beneficiary. It does not document the relationship between the beneficiaries themselves.
What protection is in a Bare Trust document to protect the Beneficiary from the Bare Trustee releasing the Beneficiaries’ identity?
Under Australian trust law, the trustee must act in the best interest of the beneficiary. The trustee cannot break the faith and provide information to third parties. To do so is a breach of faith.
To act ‘in good faith’ is to act honestly or sincerely. This is without an intention to deceive or hurt the beneficiary. This is also known as acting bona fide.
Each law firm builds its bare trust deeds differently. But in a Legal Consolidated bare trust deed, it is illegal for a trustee to accept payment (bribe) to release the identity of the beneficiary. Confidentiality is often the main reason why you set up a bare trust in the first place.
For example, you may wish to hide the true owners from competitors and other stakeholders in the same or similar industry.
Of course, an Australian law may override this. And the Courts, Family courts, Bankruptcy courts, ASIC and the ATO require full disclosure.
Further, it is usually pretty obvious to the ATO who the beneficial owner is. This is because the beneficial owner, must by law, disclose taxable income from the asset being held in trust on their personal tax return.
This is an interesting article on where the trustee tried to keep secrets from the beneficiary.
Does a corporate Bare Trustee offer more protection than a human Trustee?
- A human can be trustee of a bare trust. This is called a ‘human trustee’.
- Or a company can be trustee of a bare trust. This is called a ‘corporate trustee‘.
If you are talking about confidentiality then it would make no difference whether you have a human trustee or a corporate trustee.
If you are talking about asset protection, then, yes, a company as a trustee provides better insolvency protection.
Bare Trustee holds an asset for a Trustee of a Family Trust
Q: The Bare Trustee is going to hold some listed shares. This is in trust for the Trustee of a Family Trust.
What will show on the shareholders’ register?
A: Generally, the public listed shareholders’ register just shows the Bare Trustee name. But there may be a legal requirement to make disclosure to the company. This is even more likely if the shareholding in the company is large. Check with your accountant.
How to build a Bare Trust to hold the assets on behalf of a Trustee of a Family Trust
- Start building a Declaration of Trust Before Purchase.
- “Bare Trustee”: put in the name of the Bare Trustee
- The “Beneficiary” is the trustee of the Family Trust
Australia has two types of Bare Trusts
Consider the two most popular ‘bare’ trusts in Australia:
- Declaration of Trust Before you Purchase.
- Acknowledgement of Trust – ‘better late than never’.
1. Declaration of Trust Before Purchase –
‘hide from the next-door neighbour’
You sign a Declaration of Trust BEFORE you make an offer to buy something:
- You are the Beneficiary
- Your friend is the Trustee
- The Trust Asset is the thing you want to buy
Example of how a Declaration for Trust BEFORE you buy operates:
You own 7 out of 8 of the units in the same block.
The last unit finally comes onto the market. The vendor knows that you own all the other units. He smugly is going to hold out for a lot of money. But you never approach the vendor.
Instead, you get a friend to sign a Declaration of Trust Before Purchase. Your friend is the Trustee. You are the beneficiary.
- Build the Declaration of Trust Before Purchase Deed on the Legal Consolidated website.
- You, as a Beneficiary, sign the Declaration of Trust Before Purchase first.
- Your friend signs the Declaration of Trust Before Purchase as the Trustee.
Armed with the duly signed Declaration of Trust the Trustee presents an offer to purchase the unit to the vendor.
Upset that you never made an offer to buy the flat the vendor sells the flat for ‘nothing’.
The vendor sells the home to your friend. The vendor is unaware that you are the true purchaser.
No double stamp duty or CGT for a Declaration of Trust Before Purchase
Your friend delivers the contract of sale to you. Using the Declaration of Trust Before Purchase the property settles in your name for no additional stamp duty or any CGT. The vendor is furious. But there is nothing he can do.
- Your friend was just the ‘Trustee’ of the asset.
- You, as the beneficiary, own the asset in equity
You are the ‘true’ owner. At any time, the beneficiary can direct, the Trustee, to transfer the asset to the beneficiary. There is generally no stamp duty or Capital Gains Tax (CGT) for the transfer from the Trustee to the Beneficiary. But Legal Consolidated is not providing taxation advice on this. Speak with your accountant and tax adviser first.
Build Declaration of Trust Before Purchase the property here.
Stamp duty on a Declaration of Trust Before Purchase
Each state has its own Transfer (Stamp) Duty rules:
- ACT Revenue Office
- NSW Revenue taxes and duties – as to change of NSW trustee see here
- NT Government stamp duty
- QLD Treasury transfer duty
- Revenue SA stamp duty
- State Revenue Office Tasmania
- State Revenue Office Victoria land transfer duty
- WA State Revenue
2. Acknowledgment of Trust –
‘better late than never’
While your Trustee proceeds to buy the asset for you, there is no deed yet to record that trust relationship. Trust relationships can exist whether they are in writing or not. They are just a lot easier to prove if everything is in writing.
Whether there is a deed or not the Trustee still ‘owns’ the asset merely as a Trustee for another person being the beneficiary.
But without a Deed, you face an uphill battle ‘proving’ that you are the trust owner (beneficiary). And that your friend (trustee) is a mere trustee of the asset. These 4 people will call you a liar to your face. It is your job to have evidence to prove them wrong:
1. Family Court v’s bare trusts
‘Nice try. But only after your precious son decides to get a divorce do you, as his parents, try some feeble argument that the property in your son’s name actually belongs to you.’
sarcastically states the Family Court judge.
- You, as the parents, claim, after the fact, that you are the beneficiaries of the home. Sure the property is in your son’s name. But you argue he is merely a bare trustee.
- Parents also argue that they ‘lent’ the money to the son. But there is no Child Loan Agreement. Is this another lie?
You can not argue both a bare trust and a loan.
The parents should have had their son sign the above Declaration of Trust Before you Purchase. But you did not. So now you are building the second-best document. You build the Acknowledgement of Trust.
(Alternatively, you could have lent the money to your son. But again you should do that before you actually lent the money.)
What about Family Trusts vs the Family Court?
2. Bankruptcy Court v’s bare trusts
Your business is going under. Hang on a minute. You hold the family home as a bare trustee. After all, the money for the home came from your wife’s bank account.
Well, that argument may or may not work. You should have signed a Declaration of Trust Before you Purchase (or a Spouse Loan Agreement). But you didn’t. So now you have to build the poor cousin: Acknowledgement of Trust.
You will need more evidence of the bare trust, than the fact, that the money for the home came from your wife.
3. Australian Tax Office v’s bare trusts
You told your accountant nine years ago that while the farm is in your name you are just a bare trustee. This is for your dad. You, the son, are the bare trustee. Your dad is the true owner. Your dad is the sole beneficiary.
There are 3 requirements for a bare trust. They are:
- Trustee: Son
- Beneficiary: Dad
- Trust Asset: farmland
So you claim a bare trust. But you have to prove that. What evidence do you have? Where are the letters, emails, cheque butts, transfers of money to prove the trust relationship?
The ATO audits your bare trust
The ATO does a random audit. The ATO hears your story. Not a problem says the ATO. Just show me the Declaration of Trust Before Purchase. But, sadly, you and your dad never did one.
It is never too late to now build an Acknowledgement of Trust. It may not work. But it is the best you can do.
What if you cannot prove that dad is the true owner? Then the farm’s income is put on your personal tax return. The ATO amends your old tax returns, accordingly. The ATO adds interest on this ‘late’ tax. (This is called the General Interest Charge – GIC.) The ATO also imposes a 200% penalty. Unable to pay the ATO bankrupts you and sells the farm.
4. State Revenue, Stamp Duty Office v’s bare trusts
You have been holding the block of flats in Double Bay, Sydney on behalf of your brother.
Thankfully, your brother now directs, as the beneficiary, for you to transfer the property into his name. As the sole beneficiary, he has the absolute right to do this. And you must comply with trust laws.
You turn up to have the transfer ‘stamped’ at the local State Revenue Office. There is no transfer duty when trustees transfer property to the sole beneficiary.
“That’s right” states the stamp duty man. “Just show me your Declaration of Trust Before Purchase. And I will stamp your transfer for free.”
However, Legal Consolidated is providing no tax or stamp duty advice. Speak to your accountant and tax adviser before you sign.
When is it too late to build an Acknowledgement of Trust AFTER you buy?
It is never too late to build an Acknowledgement of Trust AFTER you buy.
Obviously, it is better to sign an Acknowledgement of Trust BEFORE the ATO, stamp duty office, family court and bankruptcy Court start their attack.
The Acknowledgement of Trust may not work. But it is the best you can do.
How does the Acknowledgement of Trust work?
The Acknowledgement of Trust is drafted after the purchase by the Trustee. The Acknowledgement of Trust does nothing other than document what has happened in the past. It is not trying to rectify or change anything. It merely records what actually happened in the past. Or, more correctly, what you believed happened in the past.
It would have been better to have documented this trust relationship before the Trustee acquired the asset. Before the Trustee acquired the asset you should have built and signed a Declaration of Trust Before Purchase. But you did not. So you are now documenting what you did in the past with an Acknowledgement of Trust. It is better late than never.
An Acknowledgement of Trust merely records past activity
The Acknowledgement of Trust merely sets out (your recollection of) the facts that took place in the past. As an example you may say:
‘Yes, as a Trustee, I acquired the asset, but it was, at all times, for the benefit of the beneficiaries. I have no interest in the asset other than as the Trustee. The money to pay for the asset came from the beneficiary, not from me. And I have plenty of evidence like cheque butts and emails to prove this.’
All the Acknowledgement of Trust is doing is recording, by way of Deed, the trust relationship that already exists.
What evidence do you have that there was a bare trust started all those years ago?
There is a real risk that the state stamp duty office or the ATO may not believe you and seek to inflict stamp duty and CGT on the Acknowledgement of Trust Deed. Be careful. Make sure you have plenty of evidence that at all times the beneficial owner was and remains the beneficiary (cheque butts, bank statements, emails etc…)
You need to prove that this Acknowledgement of Trust changes nothing. You were always the Trustee of the asset for the beneficiary. You need evidence it has always been the case.
Why did the beneficiary want you, as Trustee, to acquire the asset as Trustee in the first place? There are many reasons. These are both personal and private. For example, the beneficiary may have wanted you to buy the asset as Trustee because the beneficiary didn’t want the vendor, the public or a spouse to know what the beneficiary was up to.
Build the Acknowledgement of Trust Deed – ‘AFTER the Trustee buys’ here.