A trust (including a discretionary trust) is not subject to the enhanced disclosures associated with corporate entities, including exclusion from the necessity to initiate an annual audit. However, a discretionary trust must lodge a Trust Return with the Tax Office.

Due to the fact that a discretionary trust generally defines a wide variety of potential beneficiaries, advantage may be taken of the progressive rates of tax applicable to a number of individual taxpayers, and the flat company tax rate associated with corporate beneficiaries. A discretionary trust enables the trustee to direct variable income amounts to different potential beneficiaries each income year.

Limited recourse against the trust assets upon the bankruptcy or insolvency of its “controllers”. In the event that one or more of the potential beneficiaries becomes bankrupt or insolvent, the trustee may cease distributing income and capital to those potential beneficiaries, and thereby preserves the assets in the trust from claims by these persons. If a director of the trustee or the trustee itself becomes bankrupt or insolvent, the director can be dismissed or a new trustee can be appointed, in order to take the trust assets outside the control of the bankruptcy courts or insolvency practitioner.

The trustee of a discretionary trust may (at its discretion) accept further contributions to the trust fund at any time. Furthermore, provided it is allowed in the trust deed, the trustee may vest capital amounts in one or more potential beneficiaries from time to time before the perpetuity date for the trust.

The trustee of a discretionary trust may pay income amounts to one set of beneficiaries, and capital amounts to another. This may be useful if one beneficiary has capital losses against which it can offset the capital gains in that income year.

Provided the trust deed provides for the “attribution” of different classes of income and capital, a distribution of a class of income (such as franked dividends) can be made to one or more specific beneficiaries, with the attributes of that particular class of income flowing through to the ultimate beneficial recipient.

 In the event that death or succession duties are reintroduced in the future, the holding of the assets within a discretionary trust may allow the passing of control of the business or investments to one or more future generations without triggering these duties on the death of the current controller of this wealth.

The trust deed may define the class of potential beneficiaries to include categories of persons and other entities (such as companies and trusts) that are not yet in existence at the time the trust is originally settled. When these potential beneficiaries come into existence, they are immediately within the class of persons who can potentially benefit under the trust – without having to trigger re-settlements of the trust, or significant CGT or Stamp Duty liabilities.

Attribution is the ability to identify certain classes of income derived by a trust, and allocate portions of these income classes to particular beneficiaries. Attribution enables the trustee to distribute income classes to the beneficiaries who are able to best utilise their characteristics, and thereby achieve the most tax-effective result.

For example, the quarantining of capital and revenue losses means that a capital gain to a beneficiary with a capital loss is more valuable in after tax dollars than to a beneficiary with revenue losses. Although both beneficiaries could utilise their losses to reduce tax on the distributed capital gain, the relative “rarity” of capital gains as compared to revenue gains means there is a value to the preservation of the revenue loss.

As eluded to above, attribution is only possible if it was contemplated in the trust deed, and the various classes of income must be traceable in the accounts of the trust to the ultimate beneficiaries. It is preferable for each class of income to be paid into a separate account, and distributions to beneficiaries to be paid from the appropriate account. This practice has become less popular, and it is generally accepted that detailed accounting records of each class of income is sufficient.

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For many years the carry forward of losses within trusts was essentially unfettered. However, with the introduction of the trust loss measures in Sch. 2F of ITAA 1936, the carry forward of losses within trust structures is subject to the satisfaction of a number of complex tests. It is particularly difficult to satisfy these tests in the case of discretionary not elected to become “family trusts” under those provisions.

A discretionary trust that holds shares in Australian companies will only be able to pass on the benefit of franking credits attaching to dividends paid on those shares if the trust has made a family trust election or the extent of the franking credits is relatively minor.

In almost all recent major legislative reforms, the discretionary trust has been singled out for adverse treatment. A number of these measures were rolled back after intense political pressure was brought to bear on the government. However, there is the ever present risk that future legislative changes will make the discretionary trust a comparatively inappropriate structure for either or both investment and business purposes.