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Different Types of Trust Deeds

1. Traditional discretionary trust

It is usual to designate particular groupings of beneficiaries of discretionary trusts as primary, secondary and tertiary. Typically:
i. the primary beneficiaries will be a couple who are the clients and possibly their children;
ii. the secondary beneficiaries will be other family members and charitable organisations; and
iii. the tertiary beneficiaries will be related companies and trusts and possibly charities.
The trustee has complete discretion as to how income and capital is distributed to beneficiaries. This means any beneficiary could theoretically receive 100% of any or all distributions.
The primary beneficiaries are also usually the default beneficiaries, which means any income not distributed at the end of each year is vested in those beneficiaries to avoid a section 99A tax assessment.
The traditional trust deed provides maximum flexibility but generally, clients who want to claim the small business capital gains tax (CGT) concessions on sales of active assets (Division 152 of the 1997 Tax Act) should be able to satisfy the basic conditions for those concessions if the active asset is held in a discretionary trust as a result of the changes introduced by Tax Laws Amendment (2004 Measures No 1) Act.

This deed contains provisions which prohibit capital distributions to anyone other than a direct descendant of the initial clients unless the initial clients consent.
This deed may be attractive to clients who have concerns about sons or daughters in law or other third parties (e.g. trustee in bankruptcy) accessing the trust capital.
However, the trust has the usual wide range of income beneficiaries so the clients still have substantial flexibility for tax planning purposes.

Our standard unit trust allows for the issue of ordinary units and discretionary income units.
Clients who want each unit holder to have fixed entitlements can use this trust as there is no requirement to issue any discretionary income units.
The discretionary income units can be useful where clients want to have fixed capital entitlements in the trust but want flexibility as to how income can be distributed. They also facilitate employee bonus/incentive arrangements.
The issue, redemption or transfer of the discretionary income units does not trigger any stamp duty consequences because the deed provides that the value of the units will always be fixed a $1.00.

The fixed unit trust which we provide has a number of special features which are designed to ensure that the trust qualifies as a "fixed trust" as defined in the loss trust provisions (Schedule 2F of the Income Tax Assessment Act 1936).
Many clients and advisers mistakenly believe that a unit trust deed will qualify as a "fixed trust" under those provisions. This is not the case.
Unless there are specific provisions limiting the power of the trustee to issue or redeem units and to vary the trust (as will as other issued) the trust will not be fixed.
Interpretive Decision ID2002/750 illustrates the problems which can arise where clients mistakenly believe that a unit trust qualifies as a fixed trust.
There are a range of circumstances where clients may want to have a fixed trust.
i. For example, if a fixed trust holds shares in a company it is not required to lodge a family trust election in order to get the benefit of franking credits.
ii. Similarly, if a fixed trust holds share in a company which has losses, it will not be necessary to lodge a family trust election in order to satisfy the continuity of ownership test.
The ATO has outlined issued which it considers need to be address is a trust deed in order for the trust to qualify as a fixed trust in a confidential discussion paper which has been circulated on a limited basis and also in the minutes to the NTLG (losses in CGT Sub-Committee) meeting in October 2004.