Bare trust is one of the simplest types of trust where the beneficiary has an absolute right to the income generated from the capital and assets within the trust as well as to the capital itself (Shaw 2018). Trust assets are held in custody on behalf of the Trustee, who is responsible for the prudent management of the trust assets in such a way as to generate maximum benefits for the beneficiaries or legally under the direction of the beneficiaries or the trustee's creator.Importantly, the Trustee has no influence on how or when the Trustee's shareholding or capital is divided (Shaw 2018).
Types of bare trust
The most popular bare trust funds include (Bare Trust Guide 2018 ):
- Aggressive growth funds - the fund invests in securities yielding maximum capital gains,
- Sustainable growth funds - the portfolio of such a fund includes securities of companies from various sectors of the economy,
- Corporate bond funds - focus on corporate bonds,
- Variable Portfolio Funds - These funds invest all of their assets in shares, bonds or money market instruments,
- Global bond funds - investing in debt securities both domestically and globally,
- Global equity funds.
- Mortgage securities funds - investing only in securities that are issued under mortgage collateral,
- Growth funds invest in ordinary shares,
- High yield bond funds,
- Money market investment funds - gain income through money market investments,
- Funds investing in treasury securities,
- Funds investing in municipal bonds.
Application of the Bare trust
The Bare Trust is most often used to transfer property to descendants, i.e. grandchildren by grandparents and children by parents. Beneficiaries can dispose of these resources according to their will, provided that they have reached the appropriate age as set out in the bare trust regulations (The Board of Taxation 2011).
Specificity of bare trust
There are several important features that distinguish bare trust from other types of mutual funds, namely (Duties Act 2015 p. 77):
- the Bare Trustee is simply holding the property on trust,
- the beneficiary is the legal owner of the assets collected and the income derived from them,
- the sale of contract was between the vendor and the Bare Trustee as the apparent purchaser,
- all of the purchase money was provided by the beneficial owner and its lender and none by the Bare Trustee,
- the tax is levied on the founder of the holding fund until the beneficiary reaches the age of 18.
- this income in the form of rents, dividends and interest is taxed in favour of the beneficiary,
- The bare trust provides high tax reliefs for low-income beneficiaries,
- the bare trust document was signed before the offer and acceptance was signed,
- A Bare Trust deed must outline the role of the Bare Trustee.
The deed must be carefully drafted so that it is in full compliance with the legislative exception but also must be acceptable to the banks as they will require to check the deed before granting the loan (Duties Act 2015 p. 77).
Tax consequences of bare trust
If the founder dies within 7 years of the creation of the bare trust, the beneficiary of the fund may also be liable for the payment of inheritance tax. This is because the tax authorities consider the bare trust to be a transfer of money. However, if the founder of the bare trust dies after 7 years, the beneficiary is relieved of the obligation to pay tax (The Board of Taxation 2008) . A founder of a bare trust is not subject to tax because by transferring funds to a trust, he or she loses the legal title to the assets. The decision to establish a bare trust beneficiary is final and irrevocable (The Board of Taxation 2008).
Bare trust funds may be invested in securities subject to the following principles (The Board of Taxation 2011):
- at least 90% of the bare trust must be invested in securities admitted to public trading,
- up to 10% of the value of bare trust funds may be invested in other securities,
- no more than 5% of the fund's assets could have been invested in the same securities of one issuer, or 10% if they were different securities of the same issuer.
Benefits of an interest in a bare trust
- professional management
- diversification (The Board of Taxation 2011)
- Duties Act 2000 (Vic) April 2018 WHEN IS THE TRUST SET UP Bare Trust Guide, examined in White Rock Properties Pty Ltd v Commissioner of State Revenue 2015
- Shaw N. TAXATION OF TRUSTS GENERALLYBare trusts from the prospective of income tax, capital gains tax and inheritance tax
- Review of Tax Arrangements Applying to Collective Investment Vehicles (December 2011), REVIEW OF THE TAX TREATMENT OF BARE TRUSTS AND SIMILAR ARRANGEMENTSThe Board of Taxation
- ‘Review of tax arrangements applying to managed investment trusts – discussion paper’ October 2008 DEFINING THE SCOPE OF A MANAGED INVESTMENT TRUSTThe Board of Taxation, paragraphs 11.13 – 11.21
Author: Natalia Jaskot