Legal Tip 324: Notional Settlors in Trusts

The settlor is the person who gifts property to the trustee to start off a discretionary trust, or sometimes a unit trust.

For tax reasons they must be excluded from every benefitting from the trust to avoid the top marginal tax rate applying under s102 ITAA36.

But a settlor is any person who gifts money or other assets to the trust. A gift to a trust is called ‘settle on trust’.

When setting up the trust deed you should make sure that settlors other than the initial settlor are excluded. Excluding people who gift after the trust is established will cause those persons to be excluded from being beneficiaries of the trust.

These are termed ‘notional settlor’ provisions.


Example

Homer gets a trust established by deed with his mate Ned as the initial settlor and Company Pty Ltd as trustee.

Things are going well and Homer gifts $10,000 to the trust when the trustee is short when settling on a property. Nothing further is thought about it.

A few years later Homer realises that the deed is worded in such a way that anyone who settles property on the trust are excluded from that point onwards.

Homer has not been a beneficiary of the trust for years now, yet he has been receiving income from the trust as a beneficiary – which disastrous legal and tax consequences.


There is case law that says only the initial settlor needs to be excluded for s102 ITAA36