Taxation

[¶24.9] Study questions – TRUSTS

7. Minnow Pty Ltd is an Australian resident company that is trustee of a discretionary trust. During the 2015/16-income year, the trust estate derived $100,000 of interest income from Australian sources and $100,000 of rental income from foreign sources. On 30 June 2016, the directors of the company resolved to distribute one-fifth of the income of the trust estate to each of : Ginger (a 30-year-old Australian resident), Thurston (get a credit otherwise double taxation)(a 90-year-old foreign resident), Mary-Anne (a 16-year-old Australian resident), and F Co (a company resident in Fiji). No resolution was made in respect of the balance income. Advise how the net income of the trust estate is taxed. (company tax rate)

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Q1; presently entiled? Q2 not under a LE?

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2. The allocation of tax liability for trust income primarily depends on whether: 1) A beneficiary is presently entitled to the income; and 2) Whether such a beneficiary is under a legal disability.

“Presently entitled” P681

• 1)  The beneficiary must have an immediate right to receive or demand the trust income or have it applied according to his or her direction.S 95A(2) ITAA36 P683 →if the beneficiary’s right to demand the payment is contingent to something→they are  not presently entitled →e.g. the beneficiary get $1000 when he reach 21 years old, when he reach 21, he is  presently entitled. But when he is not 21, his right of demand the payment is  contingent to the aging, not presently entitled.  
• 2)  A beneficiary under a discretionary trust is not presently entitled until the trustee  exercises its discretion in their favour.S101 ITAA36 P684  →the beneficiary is not have the right to demand the income.  
• 3)  A beneficiary who is a non-resident at the end of the year of income is not presently  entitled.S97(2) ITAA36  

“Legal disability” P680

• 1)  Beneficiaries who cannot give a valid discharge to the trustee in respect of payments made to them.  
• 2)  These include minors, the insane, undischarged bankrupts, intellectually impaired persons: each lacks contractual capacity.  

The concepts of present entitlement and legal disability give rise to three scenarios (p690 example): 1) Beneficiary presently entitled and not under a legal disability.

1) The beneficiary is taxed on his/her share of the trust income: s.97 ITAA 1936. 2) If the beneficiary is a non-resident, his/her share will be taxed first in the hands

of the trustee at the rates applicable to non-residents [s.98(3)&(4)]. The beneficiary is also taxed on the income but is allowed a credit for the tax already paid by the trustee [s.98A(1) ITAA 1936].

2) Beneficiary presently entitled but under a legal disability.

• 1)  The trustee is taxed at the rate applicable to the beneficiary:s.98 ITAA 1936.  The tax is calculated as if the trust income was the only income of the beneficiary and no deductions were available. (trustee pay tax on behalf of beneficiary because beneficiary is under legal disability)  
• 2)  If the beneficiary derives other income or also presently entitled to income of another trust estate, the trust income is added to that other income and the beneficiary is taxed on the total. However, the beneficiary is entitled to a tax credit for any tax paid by the trustee:s.100 ITAA 1936.  

3) No beneficiary is presently entitled. (A discretionary trustee refuses to distribute any income)

• 1)  The trustee is taxed under s.99A ITAA36 (at the maximum rate of personal income tax – a flat 46.5%).  
• 2)  Trustee will be taxed under s.99 ITAA36 (taxed at ordinary marginal rates) if the Commissioner believes it is unreasonable to apply the s.99A ITAA36 rate. (This is done for deceased estates, bankrupt estates and trusts resulting from such events as injury, death, family breakdown).  

Steps for determining the tax allocation P687

1) Determine the net income of the trust.S.95ITAA36 2) Determine whether any beneficiaries are presently entitled. 3) Where a beneficiary is presently entitled, allocate the net income to that beneficiary for assessing purposes under: