Trust tax advantage

Taxation of Trust and Capital Gains

The trust property may be used to generate income or capital gains, giving rise to tax obligations. Generally, the trust's net income is taxed in the hands of the beneficiaries based on their share of the trust income. In some cases the trustee is taxed on behalf of the beneficiary. If there is no beneficiary entitled to the trust's income, the trustee pays the tax assessed on the trust's net income.

Capital gains and franked distributions can be allocated to beneficiaries for tax purposes. This is done by making beneficiaries specifically entitled to those amounts.

Income Tax Advantages

  • Net income in a financial year can be distributed amongst beneficiaries in a way which minimises total income tax payable by the family unit.
  • The classification of trust income, for example, dividend income, foreign income, or capital gain continues to be recognised under the same classification in the individual beneficiary’s income tax return and any imputation credit or foreign tax credits flows through to the beneficiaries as per trustee’s discretion.
  • If beneficiaries are under 18 years of age, by distributing income to them, trustees can avail their tax free threshold.
  • If there are no individual beneficiaries in marginal tax rate lower than company tax rate (at the time of writing 30%), then trustees can distribute income of the trust to a (new and not trustee) company and pay tax on income at the company tax rate.
  • The trustee can decide not to distribute any income of the trust and instead accumulate income of the trust. The trustee is liable to pay tax on the net income of the trust at the highest Individual tax rate. However, the commissioner of taxation has the discretion to charge tax rates applicable to an individual of an identical amount.
  • Only net income of the trust has to be distributed, a trust can also contribute superannuation for a beneficiary, which means that tax on income of the trust can be limited to tax rate on contribution to superannuation which at the time of writing is 15%.
  • If a trust has a loss and has received imputation credits in the financial year, the trust can lodge its own income tax return and carry forward the loss to the next financial year and claim a refund of imputation credits.

Capital Gain Tax Advantages

  • On disposal of any asset of the trust, it is entitled to a 50% discount factor on capital gains, if assets are disposed after one year; this discount flows through to beneficiaries’ on distribution.
  • If trustee distributes trust assets to a beneficiary, capital gain event triggers and the trustee will be deemed to have sold the asset to the beneficiary at its market value. This capital gain can be allocated / distributed to the same beneficiary or to another beneficiary with the discount factor if applicable.

Disadvantages of a family trust

  • Disadvantage of operating with a trust structure is that it cannot distribute capital or revenue losses to its beneficiaries. Hence, when a trust incurs a loss beneficiaries are not able to offset that loss against any other assessable income that they may derive from other sources such as salary, interest, dividend etc.

Disclaimer

Every effort has been made to offer the most current, correct and clearly expressed information possible within this site. Nonetheless, inadvertent errors can occur and applicable laws, rules and regulations may change.

These materials on this website are general in nature. It is made available on the understanding that the JH Business Services & Taxation is not thereby engaged in rendering professional advice. Before relying on the material in any important matter, users should carefully evaluate its accuracy, currency, completeness and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances.

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JH Business Services & Taxation
Accounting | Business Advisory | Tax Services
Specialist in small to medium business 
& personal tax services


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