Taxation of trusts - Please help =)

Hi.

I had a few questions about the taxation of trusts, given that Im new to this field. Your input would be very much appreciated =)


1) Does the $6000 tax free threshold apply to trustees who are taxed under s99 (where no beneficiaries are presently entitled)?

2) Is a trustee taxed in accordance with Schedule 10 or 7? Does it move from Schedule 10 TO Schedule 7?

3) Does the "net income" (s95) of the trust include accumulated income from the previous income year? (the trust deed states that income is to be accumulated)
ie. If the trust is administered on 30th June 2008, the trust income is $5500 and net income is $3000, and nothing was paid to beneficiaries in that period, I understand that no one is presently entitled to that amount. Does that mean that this amount accumulates to the net income (s95) of the next year? (the trust deed does say income accumulates).

4) from the above example, does that then mean the trustee receives an assessment for 2008 on the $3000 net income amount? THEN the remaining amount of the net income (after the trustee pays tax) is accumulated towards the net income of the following year?


Thanks so very much in advance for any input =)

 

Missy81,
I will answer as best I remember as you have not had a response as yet.
I am not a tax accountant so it is not my speciality field.

If a trust does not distribute its net income to beneficiaries, then it will be taxed at the top rate for the first $.

The taxation of income is based on the net income from that year per your trust tax return, a carry forward notion has no relevance for tax purposes in this regard. You can carry forward tax losses.

The retained after tax profits from one year is not then reassessed the following year for tax purposes.

It would pay to get some professional advice. If it is different to this, please let me know.
Greg

 

Wow tough questions.

Assuming not a deceased estate and beneficiaries are not minors.

My answers/guesses:
1. No
2.
3. No. because the trustee would have paid tax on it. It would then be captial of the trust.
4. I think so.

May I ask what is the situation relating to these questions?

 

1. No
2. What are the schedule 7 and 10? You would be taxed at the rate applicable in one table or the other. If this relates to 3 year period then it you move after 3rd assessment.
3. No, net income does not accumulate for tax purposes. You will be taxed on "new" income only. The exception is losses which are carried forward to reduce following year/s income. Present entitlement is a different concept ... a person could be presently entitled and yet not actually receive anything.
4. The net income, less tax, will effectively become capital (in the nature of accumulated or undistributed profits). It should not be taxed again in subsequent years.

 

Hi Greg:

I have a question here:

If a trust has $10,000 income for the financial year and it's invested in term deposit or share, what's the tax like?

 

The $10,000 would be corpus of the trust and this need not be distributed. It is only the income which needs to be distributed and in this case that would be the interest.

p.s there are some trusts which can retain income and this is then taxed at the marginal rate of the beneficiary - such as a special disability trust (as defined under the social security act).

 

If the $10,000 is INCOME (as opposed to the amount invested), and the income is not distributed (other assumption is that it is a standard discretionary trust) then tax at the top marginal rate+ medicare would be $4650.

So the amount to be accumulated is (10,000 less tax 4650) $5350.

However - the original example quoted by Missy81 does not sound like a standard discretionary trust, as it states income is to be accumulated. It sounds more like a testamentary trust.

 

Qak,

It could be a testamentary trust. A testamentary trust is just a trust set up under a will. It could be fixed or discretionary or a special disability trust or a bare trust for a minor.

Depending on the trust the trustee may be able to retain income and who it is attributed to could differ depending on what sort of trust it is and the terms. e.g. if it is a trust for a minor, the trustee may be able to retain the income but have it taxed in the hands of the child beneficiary - the child could be presently entitled. Under s102AG of the ITAA 36 a child receiving income from a will or TT will be taxed at adult rates on this income. So from next fin year the child could earn up to $20,400 or so from the trust and pay no tax - even if the income is retained by the trust. I think the relevant legislation on taxing trusts is s99 or s99A of the ITAA 1997.