Lesson 3 of 3 · 7 min
Revocable, discretionary, and what it all costs
Section 78 decides whether a trust can be undone. Sections 161 and 164 decide how it is taxed, and specific versus discretionary is where the sting sits.
Section 78 sets out when a trust can be undone, and the list is short. A trust made by will can be revoked at the testator's pleasure — nothing has moved yet, so nothing is being taken back.
A trust created any other way can be revoked only in three situations: where every beneficiary is competent to contract and they all consent; where the author expressly reserved a power of revocation in the instrument itself; or where the trust was for paying the author's debts and the creditors were never told.
That is the whole list. So 'revocable' is not a state of mind you can arrive at later. It is a clause somebody wrote in at the very start, or it is not there.
| Question | Specific (determinate) trust | Discretionary trust |
|---|---|---|
| Who gets how much | Fixed by the deed — each beneficiary's entitlement is written down | The trustee decides, within whatever limits the deed sets |
| Why a family might pick it | Certainty. Everyone knows their entitlement in advance | Flexibility, for needs nobody can predict yet |
| How income tax lands | Section 161: the trustee is a representative assessee, taxed in like manner and to the same extent as the beneficiary would have been | Section 164: where the individual entitlements are indeterminate or unknown, the income is charged at the maximum marginal rate |
| The sting | Section 161 has its own: where the income includes business profits, the whole of it is charged at the maximum marginal rate | The top rate is charged on the trust's income, not on what any one person actually received that year |
Two sections of the Income-tax Act do the heavy lifting. Under section 161 a trustee is a representative assessee: tax is levied on them in like manner and to the same extent as it would be leviable upon the person represented. A specific trust is therefore taxed as the beneficiary would have been anyway.
Section 164 handles the other case — where income is not receivable for one named person, or where the individual entitlements are indeterminate or unknown, it is charged at the maximum marginal rate.
Section 161 carries its own version of that sting: where the income includes business profits, the whole of it goes at the maximum marginal rate too.
Myth
“Setting up a family trust is how the wealthy cut their income tax bill.”
Mostly false
Section 161 taxes a specific trust broadly as the beneficiary would have been taxed, so there is nothing to gain there. Section 164 charges a discretionary trust at the maximum marginal rate where the individual entitlements are indeterminate or unknown. Section 161 charges the maximum marginal rate where the income includes business profits. Private trusts get created for succession and for dependants; on tax, the outcome is usually neutral and can be worse.
What is the family actually trying to solve?
Which of these is the real question in front of the family?
Just for you
Think of one person in your extended family whose money somebody else already handles — a grandparent, a young cousin, someone unwell. Who does it today, and what happens on the day that person is no longer around to do it?
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1 / 3
Kabir asks
A settlor transferred a flat into a trust in 2020 and now wants it back. Under section 78, when can that happen?
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