Overview
A trust is an obligation imposed on a person or other entity to hold property for the benefit of beneficiaries. In legal terms, a trust is a relationship not a legal entity.
Trusts are widely used for investment and business purposes.
In simple terms, the owner of property such as money, real estate or shares creates a trust over the property by declaring it must be held for the benefit of a beneficiary. The owner (referred to as the settlor) appoints themselves or another party to be trustee. If the settlor is not the trustee, they transfer ownership of the property to the trustee.
Types of trust
The tax treatment of a trust and its beneficiaries depends on the nature of the beneficiaries' entitlements under the trust deed. Some entities (including super funds and corporate unit trusts), although classed as trusts, have special taxation arrangements.
Trustees
The trustee must deal with the trust property in line with the settlor's wishes as set out in the trust deed (which is the will in the case of a deceased estate). While the trustee is personally liable for the debts and obligations of the trust, including its tax obligations, they can generally meet these debts and obligations from trust property.
Beneficiaries
The trustee may distribute income or capital to beneficiaries under the terms of the trust deed. Where this occurs, the beneficiaries may have tax obligations arising from their entitlement (regardless of when or whether they actually receive the amount).
Taxation of trust income 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.
Registering, reporting and paying tax
The trustee is responsible for managing the trust's tax affairs, including registering the trust in the tax system, lodging trust tax returns and paying tax liabilities arising from assessments made to them.
Beneficiaries include their share of the trust's net income as income in their own tax returns and may need to pay instalments against their expected tax through the pay as you go (PAYG) instalment system.
Sections within Overview
Last Modified: Friday, 19 October 2012