1. Trusts and Partnerships Continued Lecturer: Arvin Ajay Sami
LAW 601 – Taxation Law
Trusts
and
Partnerships
Continued
Lecturer: Arvin Ajay Sami
2/10/2017

2. Overview
Partnership
Trusts
Deceased Estates
2/10/2017

3. Trusts Sections that will be covered: s.2 – definition of trust
s.7(1)(g)
s.11(p)
s.14(3)
s.33
s.42
s.51
Schedule 4

4. Trusts
What is a trust:
A trust is an arrangement in which one person (the trustee),
Owns property (the trust property) and
Holds this property for the benefit of another (the beneficiary)

5. Trusts A trust is an arrangement or relationship
It is not a legal entity
A company is a legal entity
A family or a partnership is only a relationship
It is common to give a trust a name; e.g. “the Patel Family Trust”

6. Trusts
A trust relationship is a private matter of interest only to the trustee and beneficiary
Dealings with property being acquired or sold or leased take place between the trustee and third party without any involvement of the beneficiary
e.g. property owned by Max as trustee for beneficiary Ben. Property being leased by Propco for 2 years. Lease arrangement is between Max and Propco.

7. Trustee
In line with a trustee’s full regular ownership of the trust property, a trustee is personally liable for debts and obligations incurred while acting as trustee.
Trust assets are not available to satisfy liabilities incurred by a person when that person is not acting as a trustee

8. Trustee
A trustee’s personal assets are not at risk regarding ‘liabilities of a trust’ for two reasons:
First, a trustee is entitled to be indemnified out of trust property
Second, trustee is free in contracting with anyone to limit his liability to the value of trust assets

9. Trustee
Generally, a trustee has no claim to be indemnified by the beneficiary of the trust
However, a trustee who incurs a liability specifically on the request of the beneficiary will have a right to be indemnified, if necessary, by the beneficiary
2/10/2017

10. Trustee
A trustee is an owner of assets subject to obligations in favour of beneficiary
The right of beneficiary is that the trustee performs his obligations
All trustees are subject to general fiduciary duties
e.g. to act bona fide in the best interest of the beneficiary, to avoid conflict of interest situations

11. Trustee Who can be a trustee?
Any person of full legal capacity may act as a trustee
An individual may be a trustee
A company, if authorised by its memorandum, may act as a trustee (‘trust company’).
This company will derive a fee income from acting as a trustee

12. Trustee
A trust may be created with a single person as trustee, or two or three trustees
The practice of appointing two individuals to act as trustees of a trust helps in preventing fraud by the trustee and results in less inconvenience if one of the individuals should die
Note: if all trustees die, or become incapable, the court will appoint a new trustee in line with the maxim of equity that a trust arrangement should never fail for want of a trustee

13. Beneficiaries The beneficiary(ies) of a trust must be a legal person
The beneficiary(ies) of a trust must be certain in the sense that the criteria used to identify the beneficiary(ies) are clear and precise; e.g.
for A, B and C (named parties);
for my grandchildren;
for employees of Xco.

14. Beneficiaries
A trust for the benefit of "my friends" is conceptually uncertain and invalid.
There can be a period of time when the particular identity of the beneficiary(ies) is unknown.
e.g. a trust for "my grandchildren" could be created at a time when there are not yet any grandchildren or there is a possibility of further grandchildren

15. Beneficiaries Equity does not permit purpose trusts.
There is one exception to the rule forbidding purpose trusts.
This is the charitable trust; a trust for charitable purposes as defined by the law.
A trust may have one, through to a multitude of beneficiaries.
The trustee may be a beneficiary provided he/she/it is not the sole beneficiary.

16. Trust Who can create a trust? Anyone can create a trust.
Most trusts arise because someone sets out to create a trust.
The law sometimes creates a trust.

17. Trust 3 ways to create a trust: Declaration of trust
A person who owns property may declare themselves to be trustee of the property for identifiable beneficiaries
Settlement on trust
Property may be transferred to another on terms that the transferee is to hold the property on trust for identifiable beneficiaries
Will creating trusts
A will can provide for the creation of a trust on death

18. Trusts 2 ways the law can create a trust: Statutory trusts
Legislation sometimes expressly provides for a trust.
s.82 ITA - sums deducted by an employer under the PAYE system are held on trust for the Commissioner
Implied, resulting and constructive trusts
A trust may arise in the absence of any express intention because equity so provides.
Equity rules that property owned by one person is held on trust for another in order to achieve justice.

19. Trusts Uses of a trust: Estate planning Commerce
Estate planning is concerned with the conservation and allocation of family wealth and, to a greater or lesser degree, the minimization of tax, in particular wealth taxes (e.g. death duty).
Commerce
Trusts are used in a variety of ways in a commercial context.
e.g. a trust can be used as a pooled investment vehicle

20. Taxation of a Trust
Where trust property gives rise to income, who should be taxed on this income;
the trustee who formally derives the income, or
the beneficiary(ies)?
The issue is directly addressed in s.42.

21. Taxation of a Trust
s.42 is the ITA’s principal provision concerning the taxation of trusts.
s.42 establishes two rules.
Tax is levied on the beneficiary where the beneficiary is presently entitled to trust income.
And then a qualification. Provided the beneficiary is under no legal disability.
Tax is levied on the trustee where there is no beneficiary presently entitled to trust income, or, a beneficiary presently entitled is under a legal disability.

22. Taxation of a Trust s.2 – definition of trust
s.7 is the Act’s charging provision for normal tax.
s.7(1)(g) provides for normal tax to be levied on the chargeable income of; “(g) a trustee in respect to the income of the trust as calculated under sub-section (1) or (3) of section 42 for the year of assessment.”
Note: The ITA does not have a clause “(f)”

23. Taxation of a Trust
Normal tax levied under s.7 is levied at rates detailed in Schedule Four (s.7(3)).
The rate applying to the trustee varies according to the identity of the trustee.
Schedule Four distinguishes between trustees who are resident individuals, non-resident individuals and companies.

24. Taxation of a Trust s.11(p) provides a link between s.42(2) and s.7.
Under s.42(2) trust income is to be taxed in the hands of the beneficiary.
This is achieved by a beneficiary including trust income in his calculation of total income.

25. Taxation of a Trust
s.15(4) is an anti-avoidance rule that deems income arising under a revocable trust to be derived by the settlor.
s.14(c) assumes that income of the settlor under s.15(4) is derived in Fiji.
s.33 provides a definition of chargeable income of a trust, deceased estate or a settlement.
The chargeable income under s.33 concerns the chargeable income of a trust etc. as an accounting entity.

26. Taxation of a Trust
The three sub-sections under s.42 outlines 3 different cases.
trust income to which no beneficiary is presently entitled (s.42(1)).
trust income to which a beneficiary is presently entitled only the beneficiary is under a legal disability (s.42(3)).
trust income to which a beneficiary is presently entitled and the beneficiary is under no legal disability (s.42(2)).

27. Deceased Estates
When an individual dies it becomes necessary to finalize his or her affairs.
Involves the following:
paying all creditors of the deceased,
satisfying testamentary expenses and
then distributing or applying the residue of the estate in accordance with the will of the deceased or as the law otherwise provides

28. Deceased Estates
A will nominates a person(s) to execute or carry out the provisions of the will.
This is the executor. (A person appointed executor by a will is free to refuse the office.)
Note – executor is not a trustee
Probate is the process of filing the will (after death) with the court registry.
The court confirms the will’s appointment of the executor.

29. Deceased Estates The property of the deceased vests in the executor.
The executor is subject to fiduciary duties to properly administer the property

30. Deceased Estates In dealing with the residue of a deceased estate:
a will may provide for property to be transferred directly and immediately to heirs, or
provide for a testamentary trust, or
do both.
residue is used here to refer to assets remaining after satisfying creditors and testamentary expenses