Trusts are widely used for investment and business purposes.
A trust is an obligation imposed on a person or other entity to hold the property for the benefit of beneficiaries. While in legal terms a trust is a relationship, not a legal entity, trusts are treated as taxpayer entities for the purposes of tax administration.
The trustee is responsible for managing the trust’s tax affairs, including registering the trust in the tax system, lodging trust tax returns and paying some tax liabilities. Beneficiaries (except some minors and non-residents) include their share of the trust’s net income as income in their own tax returns. There are special rules for some types of trust including family trusts, deceased estates and super funds.
Trust Income:
The net income of a trust (effectively its taxable income) is its assessable income for the year less allowable deductions worked out on the assumption that the trustee is a resident (even if the trustee is actually a non-resident). Because the income of a trust is determined in accordance with the trust deed and its net income is determined in accordance with tax law.
Generally, the net income of a trust is taxed in the hands of the beneficiaries (or the trustee on their behalf) based on their share of the trust’s income (that is, the share they are presently entitled to) regardless of when or whether the income is actually paid to them. For example, if the beneficiary has a 50% share of the trust’s income, they are assessed on a 50% share of the trust’s net income. This is referred to as the proportionate approach. Special rules apply to franked distributions and capital gains included in the trust’s net income.
A beneficiary is presently entitled to trust income for an income year where they have, by the end of that year, a present or immediate right to demand payment from the trustee. The entitlement will depend on the trust deed and any discretion that the trustee has under the deed to allocate income between beneficiaries. The trustee will need to provide each beneficiary with details of their share of the net income so that the beneficiaries can include this amount in their tax returns. Trust capital gains and losses.
Disposal of a trust asset (or another capital gains tax event) is likely to result in a capital gain or loss for the trust (unless a beneficiary is absolutely entitled to the asset). Capital gains and losses are taken into account in working out the trust’s net capital gain or net capital loss for an income year:
A net capital gain is included in the trust’s net income.
A net capital loss is carried forward and offset against the trust’s future capital gains.
As part of the net income of a trust, the net capital gain for the year is then allocated proportionately to beneficiaries based on their entitlements to trust income – unless:
There is a beneficiary that is specifically entitled to the capital gain, or
The trustee (of a resident trust) chooses to be taxed on a capital gain.
This choice can be made provided all or part of an amount relating to the gain has not been paid to, or otherwise allocated for the benefit of, a beneficiary during or within two months of the end of the income year. This rule allows the trustee to choose to pay tax on behalf of a beneficiary who doesn’t immediately benefit from the gain.
If there is no beneficiary entitled to income (or specifically entitled to the capital gain) the trustee is taxed on the capital gain.
Where the trustee is taxed on trust net income at the top marginal rate, they are not entitled to the CGT discount on the gain.
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