A discretionary trust must distribute all income in a financial year, any undistributed funds are hit with the maximum tax rate (penalty tax). But what's "income" - my trust deed has a clause that says "The trustee has absolute discretion in determining whether any receipt, gain, payment, profit, loss, outgoing, money or investment in respect of any accounting period shall be treated as income or capital of the trust". Does this mean the trust can reinvest say dividends (e.g via a DRP) from year to year without incurring the penalty tax? Or simply that legally the deed permits the trust to retain funds as capital - and the ATO will levy penalty tax on it as income? The reason I'm looking at this is that my two youngest will be 18 in a few years, and (hopefully) at Uni, so I'd like to capitalise some of the trust income to distribute when they're of age and needing the dough. I know/believe I could use a company as a beneficiary and go through the 'pay company tax now and claim franking credits later' business, but that's a fair bit of admin overhead. Ben
Trustee would pay tax on the income. Make sure the trustee has the power to retain income too and watch out for default beneficiary clauses.
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