Trusts and trust accounts are more common than you would think. Whether it’s supporting your family, business or company assets, they are an integral part of the Australian economy. The team at Online Tax Return have put together a guide to common trust tax terms to assist you in understanding the function and benefits of becoming a trust beneficiary for trust income.
A trust is an obligation imposed on a person or entity (known as the Trustee) to hold property for the benefit of the trust beneficiaries. In Australia, trusts are used primarily for investments and business purposes. The type of trust impacts the rate of tax that applies.
Trusts are categorised as follows:
A Discretionary Trust, sometimes referred to as a Family Discretionary Trust, occurs where the beneficiaries are primarily family or related members, and the trustee has full discretion of which beneficiary gets which distribution portion of trust income or capital.
The trustee owns the trust property and distributes income of the trust to beneficiaries with a common purpose each year. A common purpose can include minimising the total income tax to be paid on the trusts’ net income.
Discretionary Trusts can not run for more than 80 years. At the agreed ending date of the trust, or the “vesting day,” beneficiaries are entitled to the whole of the trust fund.
Fixed trusts are a trust in which people have fixed entitlements to all income and capital at all times during the income year. The trustee is then bound to make a distribution to the beneficiaries within a fixed or predetermined manner, set out in the trust deed.
Unit trusts are a variation of fixed trusts. The beneficial ownership of the trust property is divided into several fixed units. Examples of unit trusts are property and cash management trusts.
Deceased Estate Trusts
A deceased estate trust arises from the death of a taxpayer (settlor).
A discretionary family trust (or family trust) is among the most common small business structures in Australia. Discretionary Family Trusts provide families with flexibility of sharing the tax burden amongst family members and protecting assets.
The trust settlor, otherwise known as the creator, creates the trust.
The trust deed sets out the terms and conditions under which the trust is established, which are maintained through the life of the trust.
The trustee is responsible for managing trust tax return and other tax obligations. The trustee can be an individual or a company but must be legally capable of holding the trust property.
A trust beneficiary can be a person, company or the trustee of another trust. Beneficiaries generally have an entitlement to any trust income or capital, set out in the trust deed.
Trust income is taxed to either the beneficiary or to the trustee, depending on the circumstances.
- The beneficiary is assessed depending on their present entitlement to trust income, provided they are not under a legal disability.
- The trustee is assessed on behalf of the presently entitled beneficiary, who is under a legal disability.
- The trustee is assessed on net income of the trust to which no beneficiary is presently entitled.
For a beneficiary to be presently entitled to trust income, the following two conditions must be satisfied: the trust income must be legally available to the beneficiary, and the beneficiary must have an absolute interest in possession within the trust income.
Occurs when the trust made a loss within an income year and income cannot be distributed to beneficiaries. This loss can then be carried forward t reduce the trusts net income in a later financial year.
Tax Rates Payable
Company and adult beneficiaries are required to pay tax on their share of the trusts’ net income, based on their individual tax rate application.
The trustee pays tax on behalf of non-resident beneficiaries or minors, based on their share of the trusts’ net income. These beneficiary types may be required to declare their share of the trusts’ net income in their income tax return but can claim a credit for the tax paid on their behalf by the trustee. Generally, higher rates of tax apply to trust distributions made to minors.
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This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.