The discretionary trust is made easy.

There are a few different types of trusts that you can set up for your estate planning needs, and one of the most versatile is the discretionary trust. This type of trust allows the trustee to use their discretion when it comes to distributing assets to the beneficiaries. This blog post will discuss what discretionary trust is, how it can benefit you, and some of the things you need to consider before setting one up.

What is a discretionary trust, and what are its benefits?

For many people, the idea of ​​setting up a trust is shrouded in mystery. However, trusts can be a helpful tool for managing assets and achieving financial goals. One type of trust is discretionary trust. A discretionary trust is an arrangement in which a trustee holds property for the benefit of one or more beneficiaries.

The trustee has discretion over distributing the trust property within the boundaries set by the trust deed. This can provide flexibility to respond to changing circumstances, such as a beneficiary’s need for financial assistance. Discretionary trusts can also offer tax advantages and help to preserve assets for future generations. As with any type of trust, it is important to seek professional advice to ensure that it meets your specific needs.

What is the trustee’s role in a discretionary trust?

A trust is a legal arrangement in which one person (the trustee) holds the property on behalf of another person (the beneficiary). A discretionary trust is a type of trust in which the trustee has discretion over how the trust property is to be used.

The trustee may, for example, decide to make distributions to the beneficiaries at their own discretion. The role of the trustee is to manage the trust property in accordance with the terms of the trust agreement.

The trustee must also act in the best interests of the beneficiaries and comply with all applicable laws. As such, the role of the trustee in a discretionary trust is both important and complex. If you consider creating a discretionary trust, it is essential to seek professional advice to ensure that the trust is properly structured.

How do you set up a discretionary trust?

A discretionary trust is a type of trust where the trustees have discretion over distributing the trust’s income and capital. This means that the trustees can decide, at their discretion, who will benefit from the trust and in what ways.

The settlor (the person who sets up the trust) may provide some guidance to the trustees in the trust deed, but ultimately it is up to the trustees to decide how to administer the trust best. This type of trust can be useful for people who want to provide for multiple beneficiaries but do not want to specify exactly how the assets will be divided up. It can also be used to protect assets from creditors or divorce proceedings.

Setting up a discretionary trust requires drafting a trust deed and appointing trustees. Thorough planning is essential to ensure that the trust meets your specific needs.

Suppose you are considering setting up a discretionary trust. In that case, it is important to seek professional advice to ensure that the trust is properly structured and that you understand all of your obligations as a trustee. Trusts can be complex legal arrangements, and it is crucial to get everything right from

Things to consider before setting up a discretionary trust

Before setting up a discretionary trust, there are several important factors to consider. First and foremost, you need to decide who will be the trustee. This person will be responsible for managing the trust and making decisions about how the assets are distributed. It is important to choose someone you trust implicitly, who has the financial knowledge and experience to make prudent decisions. It would be best if you also determined what types of assets will be held in the trust.

These can include cash, investments, property, and even businesses. Once you have decided on the trustee and the assets, you need to draft a trust deed that outlines the terms of the trust. This document will spell out the duties of the trustee and the powers they have to make distributions. Finally, you need to fund the trust by transferring the assets into it. Once the trust is funded, it can begin to operate.

Discretionary trusts can be complex legal arrangements, so it is important to seek professional advice before setting one up. This will ensure that the trust is properly structured and that you understand all of your obligations as a trustee. Trusts can be an excellent way to provide for multiple beneficiaries, but only if they are properly planned and executed.

Pitfalls of a discretionary trust you should consider

Whilst discretionary trust can be a very useful tool, there are also some potential pitfalls that need to be considered. These include the following:

– The trustees have a great deal of power and discretion, which can lead to abuse if they are not properly supervised.

– If the trustees make bad investment decisions, the trust can lose money.

– Discretionary trusts can be expensive to set up and maintain.

– The rules governing discretionary trusts are complex, and it can be difficult to change the terms of the trust once it has been created.

ATO’s New Crackdown on Discretionary Trusts

The ATO has just published new guidelines on trust distributions to adult children, corporate beneficiaries, and business entities that are in debt. Depending on the structure of these arrangements, there is a danger that the ATO may take an unfavourable view of what were previously considered to be legitimate agreements.


Many business owners use a trust structure for a variety of reasons, including tax optimization and asset protection. Many enterprises are incorporated through the formation of trusts. Over the years, the Australian Taxation Office (ATO) has grown more suspicious of trust structures that it believes are frequently used simply to minimize taxes.

The ATO recently revised its instructions, which now concentrate on how trusts distribute money, and to whom! As a result, formerly acceptable practices may no longer be allowed. This may result in higher taxes for family groups in the future and perhaps retroactively.

Target section 100A of the Tax Act,

The ATO is focusing on arrangements under Section 100A of the Tax Act, particularly ones in which a low-rate tax beneficiary receives trust distributions but the true value of the distribution is handed or paid to another individual with a higher tax rate. In this regard, the new ATO Taxpayer Alert (TA 2022/1) shows how section 100A may be used to increase the tax payable on distributions from discretionary trusts.

The ATO is also concerned about dividend washing arrangements, in which a corporate beneficiary receives a trust distribution that includes franking credits but then hands those credits over to an individual shareholder who has a lower tax rate. These arrangements are specifically targeted by the new ATO guidelines.

As a result, the ATO’s new draft ruling now defines “tax benefit” to include any relevant advantage derived from an arrangement that may be secured through tax law. This lowers the bar considerably and might cover a wide range of arrangements.

Assessing the Risk

The Australian Taxation Office has issued an accompanying guideline that provides taxpayers with a risk assessment framework to use with their accountants to determine the level of risk present in current and past distributions. The ATO has provided numerous instances of high-risk arrangements, including those listed below, in the manual:

  1. Arrangements in which the currently entitled beneficiary lends or gives some or all of their entitlement to another party, resulting in a tax benefit under the arrangement
  2. When trust income is paid back to the trust in the form of taxable income by the corporate beneficiary, and the charity receives a tax benefit,
  3. When the currently eligible beneficiary receives units from the trustee (or related trust) and the amount owing for those units is offset against his or her right, this is referred to as a set-off.
  4. There are certain situations where a share of net income is included in a beneficiary’s taxable income to such an extent that the amount paid exceeds the beneficiary’s entitlement.
  5. When the presently entitled beneficiary has losses, it is known as a “loss situation.”

The ATO suggests that it will conduct further analysis of the facts and circumstances of your arrangement as a matter of urgency in cases where it falls into the high-risk category. They may proceed to audit if the additional study reveals that your arrangement’s facts and circumstances are hazardous.

What next?

The government’s new rules and standards are still in draft form, and they are expected to be completed soon. They will apply both prospectively and retroactively when finalized. The ATO has said it will follow any administrative position expressed in its prior website guidance before the new material was released for entitlements granted before July 1, 2022.

You should contact your accountant if you have any worries about your trust payments and the risk they pose under Section 100A.

In conclusion, discretionary trusts are a vital part of our tax system, but the ATO is now taking a closer look at how they are being used. It is important to speak to your accountant about any concerns you may have to ensure that you are compliant with the new rules.

Please feel free to contact me if you would like more information on this topic.

Contact us as Ingrams Accounting here if you need any help with your crypto tax obligations.

This information is general and prepared without considering your objectives, personal or business circumstances, financial situation, or needs. Because of this, you should, before acting on this information, consider in consultation with your adviser its appropriateness, having regard to your objectives, personal or business circumstances, financial situation and needs.

Henry Viljoen

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