Guide on Trust Funds – Part 8

Family Trust income

One of the key benefits of a family trust is that the trustee can distribute income earned by the trust [from the trust property] in any way they see fit, provided distributions are made to people who qualify as beneficiaries. They do not have to make trust distributions in any particular proportion or in the same proportions as they did in previous years.

A trust does not have to pay income tax on income that is distributed to the beneficiaries, but does have to pay tax on undistributed income. The trustee is free to distribute trust income to as many beneficiaries as possible, and in proportions that take best advantage of those beneficiaries’ personal marginal tax rates. The beneficiaries then pay the tax on distributions made to them.

Distributions received from a trust are part of a beneficiary’s assessable income. If the beneficiary receives income from other sources in addition to distributions from the trust, all of the income will be taxed together.

Undistributed income is taxed in the hands of the trustee at the top marginal tax rate of 45.00% for the 2012/2013 year and 2013/14 year, giving a strong incentive to family trusts to fully distribute the trust’s income before the end of each financial year.

Family trust elections — a word from the ATO on income distributions

One important aspect of a family trust that must be kept in mind is to whom the distributions are made.

First, all distributions must be made only to people who qualify under the terms of the trust deed to be beneficiaries of the trust.

Secondly, for trusts that have made a family trust election, the distributions may only be made to beneficiaries who are within ‘the family group’. In relation to this the ATO states on its website:

“A consequence of making a family trust election or an interposed entity election is that any distributions (broadly defined) outside the family group of the family trust by the trust will be taxed at the top marginal rate applying to individuals plus the Medicare levy.”

In other words, if a family trust makes a family trust election and

then pays out to someone not a member of the family group, they will be taxed at the maximum rate possible.

Is any tax payable by the trustee?

The trustee is generally liable to pay tax on:

• that part of the net income of the trust that has not been assessed to either a presently entitled beneficiary or the trustee on behalf of a presently entitled beneficiary.
• shares of the net income of a trust in respect of beneficiaries, whether or not the beneficiaries are acting in their capacity as trustee of another trust estate, who are presently entitled to a share of the income of the trust estate but are non-resident at the end of the income year.
• shares of the net income of a trust in respect of beneficiaries who are presently entitled to a share of the income of the trust estate but are under a legal disability.
• if the trust is a special disability trust and the ‘principal beneficiary’ is an Australian resident at the end of the income year, the whole of the net income of the trust.