How to Establish a Bare Trust

A bare trust arises where the trustee simply holds property of and on behalf of the beneficiary. The trustee has no discretion and no active duties other than to transfer the property to the beneficiary when required. The trustee is merely the nominee of the beneficiaries.

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 S.106-50 and TR 2004/D25 ( note that, due to the ATO’s ongoing consultation with Treasury and professional associations in relation to “absolute entitlement” and, in particular, the “problem areas” of joint and multiple beneficiaries, and the trustee’s indemnity, TR 2004/D25 has not yet been finalized, but the ATO has provided an assurance that it will not be withdrawn and still represents the Tax Office view of the law.

Under general law, a bare trust is a “trust under which the trustee or trustees hold property without any interest therein, other than that existing by reason of office and the legal title as trustee, and without any duty or further duty to perform, except to convey it upon demand to the beneficiary or beneficiaries or as directed by them, for example, on sale to a third party.”

All types of trusts, including bare trusts, are considered entities for GST purposes (section 184-1(1)(g) of the GST Act). Moreover, the GST Act does not set out any special rules relating to certain trusts, but not others.

The GST position for bare trusts, like all trusts, is simply determined by the general concepts in the legislation. However, by reason of the legal characteristics of trust arrangements themselves, trusts raise certain GST issues that need to be addressed. In particular, in the case of a bare trust arrangement, the issues arise as to who the relevant supplier is, who the relevant recipient is and whether a taxable supply or creditable acquisition can arise in the context of such an arrangement. Of note, as there are no special rules in relation to bare trusts, this will need to be determined by an application of the general rules under GST law.

Advantages

• The main advantage is that beneficial ownership does not change. The bare trustee just holds the asset for the beneficiary.
• The trustee has no power to deal with the asset. The trustee has no power to make any decisions regarding the asset. The trustee only has the power to hold the asset for the beneficiary. The trustee must follow all instructions given by the beneficiary

Disadvantages

• Bare trusts does not prevent creditors from accessing the property under the bare trust
• The bare trust and individual ownership without a mortgage do not provide any significant asset protection
• The trustee holds the asset for the beneficiary. This may be a disadvantage
• As a bare trustee you must follow the instructions of the beneficiary

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