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Understanding the role of the Settlor

The settlor has a limited but fundamental role in creating a trust. A trust does not exist until the settlor expresses an intention for the trust to exist and transfers the settled sum to the trustee. If a settlor is not independent to the trust serious tax consequences arise.

Bridie O'Shannessy, Maddocks Lawyers

Role of a discretionary trust

The primary role of a discretionary trust is to provide asset protection to the class of persons who are the primary beneficiaries of the trust (as well as to allow those beneficiaries to achieve tax savings through income splitting).

The settlor has an important role to play in a discretionary trust in ensuring this asset protection objective is met.

Role of the settlor

The settlor must hand over the settled sum to the trustee to be held on the terms of the trust for the benefit of the beneficiaries. The trustee must issue a receipt to record this has occurred. This is the point at which the trust is created because, by executing the trust deed and providing the settled sum:

  1. the settlor has put the trustee in charge of trust property;
  2. the settlor has defined for the trustee which persons fall within the class of beneficiaries, as stated in the trust deed; and
  3. the trustee has agreed to act.

The settlor then steps out of the picture.

Why should the settlor's role be limited to establishing the trust?

There are tax implications under the Income Tax Assessment Act 1936[1] where a settlor creates a trust and:

  • has the power to revoke or alter the trust to acquire a beneficial interest in the income derived by the trustee, or take back trust property; or
  • the income of the trust is payable to the minor children of the settlor.

In such a case, the trustee of the trust will be assessed as having to pay income tax on the income of the trust by the ATO, rather than income tax being assessed in the hands of the beneficiaries of the trust to whom distributions are made.

For this reason, it is advisable to limit the settlor's role in a trust to the initial establishment of the trust and payment of the settled sum. To avoid the perception that the settlor's declaration of trust is revocable, the settlor should be unrelated to the trustee and the beneficiaries of the trust.

This is why the Cleardocs discretionary trust deed expressly prohibits the settlor (or their children) from being a beneficiary of the trust or otherwise receiving a benefit from the trust.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of trust topics.

Order Cleardocs trust packages

[1]Section 102 of the Income Tax Assessment Act 1936 (Cth).


Lawyer in Profile

Leigh Baring
Leigh Baring
PH: 61 3 9258 3673

Leigh is a partner in the Maddocks Tax & Revenue team.

Leigh regularly provides advice on:

  • structuring of businesses and transactions;
  • mergers and acquisitions;
  • corporate reorganisations and distributions;
  • sale of businesses;
  • demergers;
  • capital raisings;
  • joint ventures and property developments;
  • international tax (both inbound and outbound);
  • succession planning; and
  • liquidations.

His advice covers both direct and indirect tax considerations.

Leigh advises Australian and multinational companies, high net worth individuals, accountants and financial advisers on all areas of taxation law.