Tax issues for trusts – tips and traps
This information is for trustees and beneficiaries of trusts.
To ensure discretionary beneficiaries are:
- presently entitled to trust income, trustees of discretionary trusts must make a resolution by 30 June of that income year
- specifically entitled to franked distributions, trustees of discretionary trusts must generally make a resolution in writing, specifically dealing with the franked distributions (as opposed to trust income generally) by 30 June
- specifically entitled to a capital gain, trustees of discretionary trusts must make a resolution in respect of that capital gain by 31 August following the income year in which the capital gain is made
- Where some or all of a capital gain forms part of the income of the trust estate, the trustee will often need to specifically deal with it by 30 June, when all of the income of the trust estate is otherwise being dealt with. (This is because any capital gain forming part of the income of the trust estate cannot be specifically dealt with after a beneficiary has already been made presently entitled to it).
The resolution establishes which beneficiaries are assessed on the trust's net income.
Lodging trust income tax returns
Generally, all trusts that derive income during the year must lodge an income tax return. Ensure you lodge by the due date. There are exceptions for certain deceased estates.
- TPAL 2016/2 – Table Q outlines exceptions for deceased estates
Amounts at labels 53A and 54W
Labels 53A and 54W of the trust tax return require details of the income of the trust estate, which is the amount to which beneficiaries can be made presently entitled or can be accumulated by the trust, and each beneficiary's share of that income.
The amount to include at label 53A income of the trust estate is the total income of the trust that is available for distribution to trust beneficiaries for the income year (distributable income). Generally that amount is calculated in accordance with the trust deed. In some cases it will be different to the taxable income.
Label 54W share of income of the trust estate records the amount of the trust's distributable income that each beneficiary was presently entitled to by 30 June of that year.
Generally, a beneficiary is assessed on the same portion of the trust's net income as the portion of distributable income to which it is entitled to.
TR 2012/D1 Income tax: meaning of 'income of the trust estate' in Division 6 of Part III of the Income Tax Assessment Act 1936 and related provisions gives guidance on the meaning of distributable income. Under self-assessment, you can follow the meaning as set out in the ruling or, if you disagree with aspects of that ruling, you can apply what you understand the term to mean for the purpose of present entitlement and completing labels 53A and 54W.
At label 53A you must show the trustee's honest determination of the trust's distributable income. The trustee may think that the trust's distributable income is calculated based on one of the alternative views in TR 2012/D1 – for example, according to a so-called income equalisation clause. If so, you can include this amount at label 53A.
Even if we later consider the trust's distributable income is a different amount, the trustee won't have made an error in completing label 53A.
Zeroes at label 53A
If the income of the trust estate is a loss amount, then a zero should be entered at label 53A. Label 54 should be left blank, as trusts cannot distribute losses to their beneficiaries. Where the trust has income to distribute, the amount at 53A needs to include the total of all the amounts at 54W for income distributed to beneficiaries. It must also include any amounts to which no beneficiary is entitled.
Do not leave the labels blank
The information in these labels helps us administer the trust assessing provisions.
We use labels 53A and 54W to identify what may be contrived differences between the income of the trust estate and the net income of the trust – for example, to obtain tax benefits. If these labels are incomplete, it increases the likelihood we will review you and may lead to a penalty for making a false or misleading statement.
Exempt entities as beneficiaries
Anti-avoidance rules may apply if a trustee makes a tax-exempt beneficiary presently entitled to trust income.
Property development trusts incorrectly claiming CGT discount
We've noticed that some trusts in the property development industry are characterising their business income as capital rather than revenue to take advantage of the 50% CGT discount.
In many circumstances, the trust should not be characterising the profits from the sale of a developed property as a capital gain because the trust is either carrying on a business or is involved in a profit-making undertaking involving the development.
- TA 2014/1Trusts mischaracterising property development receipts as capital gains
Distributions to self-managed super funds
Distributions by trusts to complying super funds (particularly self-managed super funds) are considered ‘non-arm’s length income’ and taxed in the fund at the top rate of tax if the distribution either:
- does not arise as a result of a fixed entitlement to trust income
- arose due to a fixed entitlement but it is part of a non-arm’s length arrangement.
See TR 2006/7 for guidance on what constitutes a fixed entitlement.
When you complete label 11M of the self-managed super fund annual return (Gross trust distributions), you should consider whether all or part of the amount is non-arm's length income and, if so, report it at label U2 of that return (Net non-arm's length trust distributions).
You should read this if you are a trustee or beneficiary of a trust.