A trust is formed when a person (trustee) holds property as the legal owner for the benefit of someone else beneficiary. The trustee controls the property and is its legal owner. However, the trustee is obliged to use the trust property to benefit the beneficiary. A beneficiary can demand that the trustee explain her or his or actions and show that the trustee has been acting in the best interests of the beneficiary.
A formal declaration of trust should be prepared by a lawyer saying that the capital of a business is owned by a trustee. Any person or company may be a trustee and is usually the controlling interest of the business. The declaration of trust will also explain that the trustee will use the income of the business to benefit the beneficiaries of the trust. The beneficiaries of a trust must be able to be identified.
A trust allows the trustee to distribute the income of a business in any way to minimise the income tax liability of beneficiaries. The trust must submit a tax return every year. The trust must pay a high rate of tax on any income that is not distributed before the end of a financial year. The trust does not pay income tax on income it distributes to beneficiaries who must lodge their own tax returns.
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