What is a bare trust?

From time to time we encounter clients that have various types of assets held by a trustee (Trustee) that are purportedly held pursuant to a bare trust (Bare Trust).  There are several questions which usually arise in relation to the rights and obligations of the parties involved that inevitably end up with Dundas Lawyers considering the taxation issues, (in particular the capital gains tax implications, for the Trustee.

So just what is a Bare Trust?

A Bare Trust, as defined by the Butterworths Concise Australian Legal Dictionary^[1] as:

“a trust where the trustee holds the property without any beneficial interest in the property and without any further duty to perform in relation to the trust, except to convey the trust property on demand to the beneficiaries of the trust or to deal with the property as directed by the beneficiaries”.

This definition was approved by Gummow J in Re Helen Kaye  Herdegen  and Kenneth John  Herdegen  v Commissioner of Taxation [1988] FCA 419 at paragraph 37.  It was further said by Gummow J that the “…term is usually used in relation to trusts created by express declaration”.

It is generally considered that a Bare Trust is the simplest form of a trust as it is created by an express declaration of trust.  The use of a Bare Trust can be beneficial for the purposes of tax planning, however, care needs to be taken in their establishment to protect the interests of those involved.

What are the tax consequences ?

There are two (2) commonwealth taxes and one (1) state based tax to be considered by Trustees who find themselves in this position:

• income tax;
• capital gains tax; and
• state based transfer duty.

Income tax and the Trustee of a Bare Trust

Provided of course that the holding of trust property results in the Trustee receiving income, a Trustee will need to pay income tax on the amounts received.  If the Trustee and the beneficiary decide to make an election to make a return of the income and account for the income tax on it, the beneficiary who is absolutely entitled to it will be treated as receiving the income and will be liable for the income tax on that income.^[2]  This occurs regardless of whether the Trustee actually pays the income to the beneficiary.

Capital gains tax and Bare Trusts

Capital Gains Tax (CGT) applies to a capital gain which is made on a disposal of a CGT asset, subject to specific exceptions and exemptions as defined by section 108-5 of the Income Tax Assessment Act 1997 (Cth)(ITAA).

Assuming that the Trustee of a Bare Trust disposes of trust property which was acquired before 26 June 1992 (the sale of which results in a capital gain), then the question is how the CGT is to be accounted for.

Section 106-50 of the ITAA relates to ‘absolutely entitled beneficiaries’.  If an individual becomes absolutely entitled to a CGT Asset of a trust and the Trustee later sells the asset, then any capital gain or loss from the sale is made by the individual and not the Trustee.  In other words, the Trustee does not have to account for any capital gain made on assets disposed of if the beneficiary is absolutely entitled them.

For CGT purposes, any disposal of the assets of the trust by a Bare Trustee will be treated as a disposal by the beneficiary – refer to section 106.50 and TR 2004/D25.

Beneficiary absolutely entitled

It has been accepted by Gummow J in Re Helen Kaye Herdegen and Kenneth John  Herdegen  v Commissioner of Taxation [1988] FCA 419 that Trustees of Bare Trusts hold property without any further duty to perform, except to convey the trust property as directed to the beneficiaries that are absolutely entitled to it.   For a beneficiary to be absolutely entitled it must be that there is no discretion or consideration to be made and there must be no other beneficiaries with an interest in the trust property.  It follows in the case of property held on Bare Trust that the ultimate beneficial owner (UBO) of the trust property is not absolutely entitled to it unless and until the UBO directs the Trustee to transfer the trust property to it.

State based transfer duty

If the property in question is real property, then care needs to be taken to avoid ‘double stamp duty’ when creating the Bare Trust.

Declaration of trust

Broadly there are three (3) circumstances that can give rise to a Bare Trust:

• where property is settled pursuant to an express trust;
• where the Bare Trust comes into existence upon completion of the specified duties contained in a trust deed; and
• where property is purchased with another’s money.

What are the express terms of a Bare Trust?

A Bare Trust can be subject to the terms of an express trust that have been reduced to writing or they can be implied.  It follows that consideration should be had as to what the exact terms of a Bare Trust could (or should be) in the circumstances and a consideration of the nature of the trust property and each of the parties individual circumstances.

Duties under state based Trusts Acts

The duties of a Trustee of a Bare Trust are also encompassed in each respective State based Trusts Act.

No active duties

The ‘no active duties’ test was first expressed by Stirling J in  Re Cunningham and Frayling [1891] 2 Ch 567.  However, a Bare Trust is often equated with the rule in Saunders v Vautier [1841] EngR 765, although the concept predates the case.

Whilst the general rule is that the Bare Trustee should have no active duties to perform this position was challenged in by Gummow J in Re Helen Kaye  Herdegen  and Kenneth John  Herdegen  v Commissioner of Taxation [1988] FCA 419 at 43 when citing Kern Corporation Ltd. v Walter Reid Trading Pty. Ltd. [1987] HCA 20; (1987) 163 CLR 164.

Links and further references

Legislation

Income Tax Assessment Act 1997 (Cth)

Commentary

“The GST treatment of bare trusts” [2006] JlATax 5; (2006) 9(1) Journal of Australian Taxation 36

Cases

Caterpillar Financial Australia Ltd v Ovens Nominees Pty Ltd [2011] FCA 677

Corumo Holdings Pty Ltd v C Itoh Ltd (1991) 24 NSWLR 370

Kern Corporation Ltd. v Walter Reid Trading Pty. Ltd. [1987] HCA 20; (1987) 163 CLR 164

Re Helen Kaye  Herdegen  and Kenneth John  Herdegen  v Commissioner of Taxation [1988] FCA 419

Saunders v Vautier [1841] EngR 765; (1841) Cr & Ph 240

Securities Commission v Bank Leumi Le-Isreal [1995] 143 ALR 101

Further information about Bare Trusts

If you need advice on a Bare Trust or to have one prepared, contact us for a confidential and obligation free and discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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