Choice of Settlor and Consequences


As with so many other aspects of conducting business, we are increasingly having to observe international practices and standards.


One such development is The Foreign Account Tax Compliance Act (FATCA), a US Act aimed at improving compliance with US tax laws, notably the avoidance of double taxation and the prevention of fiscal evasion with respect to income tax.


FATCA imposes certain reporting obligations on Australian financial institutions (AFIs), and those of other non-US countries, to report US citizen or US tax-resident account holders to the US Internal Revenue Service (IRS).  The information reported by AFIs to the ATO is made available to the IRS, in compliance with Australian privacy laws.


The FATCA Agreement also improves existing reciprocal tax information-sharing arrangements between Australia and the IRS.  This helps ensure Australian tax laws are effectively enforced so Australian businesses and individuals who pay the correct amount of tax are not disadvantaged by those who seek to evade their tax obligations.


Failure to comply with FATCA’s requirements will expose the AFIs to a 30% US withholding tax on payments to them from US sources.


So, what does this mean for your clients’ choice of a settlor?


Under FATCA, a settlor is deemed to be a controller of a discretionary trust and, therefore is a person who needs to be identified by the AFI.  This does not take into account the very different role of a settlor in Australia to the role of a settlor in other countries.  As you are aware, in Australia, the person who acts as the settlor of a discretionary trust:-


  • has no measure of control or power over the trust or its assets or the trustee at any time;
  • is incapable of receiving any benefit, financial or otherwise, from the trust at any time;
  • has no ongoing role of any kind or type in the administration or management of the trust.


In the past, various employees of Castle have agreed to act as the settlor of discretionary trusts for the convenience of your clients.  However, that arrangement was certainly not based on an agreement to provide personal and sensitive information to financial institutions.


We know, from experience, that an account can be opened without providing the personal details of the settlor and we have developed an email which can be sent to financial institutions to explain why those details are not forthcoming.  If you would like access to that email please click here.


This leaves you and your client with two choices:-


  • continue to use one of our team members as the settlor for all trusts you establish with us and use the email if the settlor’s personal details have to be disclosed;  or
  • ask your client to find someone, who will never be capable of receiving a distribution from the trust, to act as settlor, on the understanding that their personal details will need to be disclosed.


You may find it more convenient and time-efficient to continue to use a member of the Castle team as the settlor for your clients’ trusts.

From Castle Corporate Pty Ltd

Partnering with you to get it right.