Families in Asia reviewing their wealth structures are increasingly offered a choice: a trust or a private foundation. Advisers in Singapore, Hong Kong and Kuala Lumpur may recommend a foundation in Labuan, Jersey, Guernsey or Liechtenstein, often describing it as more flexible or easier for the founder to control.
For a family with children studying or settled in Australia, or a parent who has become an Australian tax resident, the choice affects how Australian tax law treats the structure, what is reported under the Common Reporting Standard, and how a dispute would be resolved.
What is a private foundation?
A private foundation is a legal entity created when a founder endows assets to it under a charter, to be held for beneficiaries, for stated purposes, or both. It comes from the civil law tradition, where the trust did not develop, and several offshore centres have adopted it. Jurisdictions offering private foundations include:
- Liechtenstein, which has a long tradition of family foundations;
- Jersey, under the Foundations (Jersey) Law 2009;
- Guernsey, under the Foundations (Guernsey) Law 2012;
- Labuan, Malaysia, under the Labuan Foundations Act 2010, often marketed to Southeast Asian families;
- others such as Panama, Malta and the Isle of Man.
Each has its own statute, and the rules on registration, governance and beneficiaries’ rights differ.
How a foundation differs from a trust
Legal personality
A trust is not a legal person but a relationship: the trustee owns the assets and holds them for the beneficiaries. A foundation is a legal person, like a company. It owns its assets and contracts, sues and is sued in its own name, but it has no shareholders.
Council and guardian, rather than trustee
A foundation is run by a council, which works much like a board of directors. Because no shareholders hold the council to account, many foundation laws provide for a guardian or supervisory person to oversee it. Jersey and Guernsey use a guardian; Labuan’s law provides for an officer and a supervisory person. In a trust, the trustee manages the assets, and an appointor or protector may hold powers over it.
Beneficiaries’ rights
In an Australian trust, the trustee owes fiduciary duties to the beneficiaries and the court supervises the trust, so beneficiaries can ask the court to make the trustee account or act properly. Under many foundation laws, the council’s duties are owed to the foundation itself. Unless the charter or regulations provide otherwise, beneficiaries may have no right to information and no interest in the assets until a distribution is made, and some laws allow them to be kept unaware of the foundation for a period.
The founder’s role
A trust’s settlor usually steps away once the trust is made. A founder can often reserve significant powers, such as amending the charter, adding or removing beneficiaries, or sitting on the council.
Why “flexible” means something different
In a discretionary trust, flexibility lies in the trustee’s discretion and the deed’s variation power, balanced by the trustee’s duties and the court’s supervision. In a foundation, flexibility usually lies in the founder’s reserved powers and the council’s freedom from duties to beneficiaries. That is flexibility for the founder, and it can mean less protection for everyone else.
Once the founder dies or loses capacity, reserved powers may lapse or pass to people the next generation did not choose, and the structure may become harder to change. The more control the founder keeps, the more likely an Australian court or tax authority will treat the assets as effectively the founder’s, just as Australian family law looks at who really controls a trust. And a feature valid under the foundation’s own law may be treated differently in Australia.
How Australian tax law may treat a foreign foundation
Australian tax law has no separate category for foundations. A foreign foundation must be classified as a company or a trust, depending on its features. Because it is a separate legal entity, it may fall within the broad income tax definition of “company”, which includes bodies corporate. Yet the ATO has, in a private ruling, treated a Liechtenstein foundation as a trust estate because of its trust-like features and how it was controlled. Private rulings bind the ATO only for the applicant, so they indicate an approach rather than a general rule.
The classification matters. If the foundation is a company, the controlled foreign company rules may attribute income to Australian residents who control it. If it is a trust, the foreign trust rules may apply, including those taxing Australian residents who receive distributions from a foreign trust. A foundation whose decisions are in practice made by a founder living in Australia may itself be an Australian resident. Specialist tax advice is needed before the structure is set up or a family member moves to Australia.
CRS reporting
Under the Common Reporting Standard, depending on how it is managed, a foundation may itself be a reporting financial institution, or its bank may have to look through it to its controlling persons. The OECD approach treats foundations like trusts for this purpose, identifying the people in equivalent positions: founder, council members, guardian and beneficiaries. Families should expect information about Australian-resident members to reach the ATO.
Recognition and disputes
Australia has implemented the Hague Convention on the law applicable to trusts, which helps Australian courts recognise foreign trusts, but it is designed for trusts and does not neatly fit foundations. An Australian court would generally treat a foundation as a foreign entity whose internal affairs are governed by the law of the place it was established.
In practice, an unhappy beneficiary usually has to litigate in the foundation’s home court, under a law that may give fewer rights than Australian trust law. Some foundation laws also contain provisions designed to resist foreign judgments, including some family law claims. Even so, Australian courts can make orders against parties before them, and in a property settlement may take into account assets a spouse effectively controls, whatever the structure’s form.
Practical questions for families with Australian-resident members
- Who will sit on the council, and who will be guardian once the founder has gone?
- What powers does the founder reserve, and what happens to them on death or incapacity?
- What rights do beneficiaries have to information and to challenge decisions?
- How will Australian tax law classify the foundation, and where is it managed and controlled?
- What will be reported under CRS, and to which countries?
- Where would a dispute be heard, and is there a mediation step?
- How does the foundation fit with each family member’s Will?
Frequently asked questions
What is the difference between a private foundation and a trust?
A foundation is a legal person that owns its assets and is run by a council, often overseen by a guardian. A trust is a relationship in which a trustee owns the assets for beneficiaries, who are owed fiduciary duties and can seek the court’s help.
Is a foreign foundation taxed as a company or a trust in Australia?
It depends on its features. It may be a company because it is a separate entity, but the ATO has treated at least one foundation as a trust in a private ruling. Specialist advice is needed.
Are foundations reported under CRS?
Yes. They are treated much like trusts, and information about the founder, council, guardian and beneficiaries may be reported to their countries of tax residence.
Is a Labuan foundation a good choice for an Australian family?
It can suit some families, but where members live in Australia, the tax classification, CRS reporting and beneficiaries’ limited rights should be weighed against a trust.
How Chua Tan Associates can help
Chua Tan Associates helps Asian families with Australian-resident members compare a trust with a private foundation in the context of their whole plan: Wills, family business, governance and the next generation’s needs. We review charters, regulations and trust deeds, map who holds which power, and work with the family’s accountant and tax adviser on the Australian tax and CRS position. Justin Chua is a Nationally Accredited Mediator and Family Dispute Resolution Practitioner, and an Accredited Family Business Advisor, and he trained in accounting, which helps when building dispute processes into these structures. We assist clients across Australia and overseas, work with local lawyers in the foundation’s jurisdiction, have a notary public for documents needed abroad, and advise in English, Mandarin and Cantonese.
Related reading
Chua Tan Associates acts for families, executors, trustees and their professional advisers in estate planning, estate administration and estate disputes in Australia and across borders. To arrange a confidential consultation, please contact our Melbourne office on +61 3 9602 3988 or submit an enquiry. Advice is available in English, Mandarin and Cantonese.
Justin Chua (蔡智勋), lawyer and mediator, Chua Tan Associates, Melbourne. General information only, not legal or tax advice.
简体中文 
English (Australia) 
繁體中文