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3 Types of Trust Income?

Discussion in 'Accounting, Tax & Legal' started by OLI, 25th Oct, 2009.

  1. OLI

    OLI Well-Known Member

    Joined:
    15th Aug, 2005
    Posts:
    96
    Looking over my trust tax returns and financial statements from previous years there seems to be 3 different types, or amounts, of trust income.

    1. First there is the Accounting income which shows the profit (from the trusts financial statements).

    2. Then there is the Taxable income which appears on the trusts tax return (which is the Accounting income with any franking credits added and/or previous years tax losses deducted).

    3. And finally there is the (Trust Law?) net income.


    Examples:

    1. Accounting income as shown on Profit and Loss statement:
    Income received: $20K
    Expenses (cash): $10K
    Non-cash deductions (depreciation): $8K
    Accounting Income = $2K profit

    2. Taxable income as shown on tax return:
    Income received: $20K
    Expenses (cash): $10K
    Non-cash deductions (depreciation): $8K
    Franking credits: $1K
    Taxable income = $3K

    3. Trusts net income in bank account:
    Income received: $20K
    Expenses (cash): $10K
    Trusts net income = $10K cash

    From what I can gather the Accounting income is Section 97 income and is what the beneficiaries are entitled to in the end of year trust distribution. The Taxable income is Section 95 income.

    The trustee would base the distributions on the Accounting income of $2K, for example $1K to beneficiary A and $1K to beneficiary B. Under the ‘Proportionate Approach’ used by the ATO each beneficiary would be entitled to 50% of the Taxable income (being the same proportions) so each beneficiary would actually be taxed on a distribution of $1.5K rather than the $1K shown in the distribution minute.

    I don’t really have any questions, just after any comments to see if my understanding is correct.

    Apart from in the trusts tax return you can’t show the full $3K being distributed to the beneficiaries because according to the trusts Accounts the trust only made a $2K profit and is $1K short (the accounts won’t balance). The accounts also show the full amount of $10K received as cash in the trusts bank account.
     
  2. Rob G.

    Rob G. Well-Known Member

    Joined:
    6th Jun, 2007
    Posts:
    717
    Location:
    Melbourne, VIC
    2 types of income actually.

    "Accounting Income" is income according to Trust Law, which is a combination of ordinary principles and any trust deed specifications.

    The other is "taxable income" or for the purpose of s.95 referred to as "net income" after allowing for deductions.

    Modern trust deeds attempt to define trust income to be the same as net income to save complication, but seems to muddy the waters even more in some cases.

    Cheers,

    Rob
     
  3. OLI

    OLI Well-Known Member

    Joined:
    15th Aug, 2005
    Posts:
    96
    Hi Rob. That makes things a bit less complicated then. :)

    My confusion about the 3rd type of income comes from a video clip I saw on Chris Batten's website about trusts (I'll find a link). They said something along the lines of how Trust Law income is not necessarily the same as the Accounting profit so there are 3 types of income. I didn't really understand what they were saying so I may have misinterpreted it.

    In the example I posted above, if the accounting income (or trust law income) is $2K but the actual 'cashflow profit' is $10K, what is the best way for the trust to get the remaining $8K to the beneficiaries? If it is loaned the loan would continue to increase year after year.
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
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    Location:
    Sydney, Australia
    You could distribute some capital - which I believe would be taxable in the hands of the beneficiaries (??).

    Alternatively - you should consider that depreciable assets are generally expected to be replaced at the end of their useful life - thus perhaps it is worth keeping some of that money (ie the $8K) set aside for future expenses ?