Show at A the ‘income of the trust estate’ for trust law purposes. This is the income of the trust estate as that expression is found in Division 6 of the ITAA 1936 and related provisions. This is the total distributable income of the trust that the trustee determine is legally available for distribution to trust beneficiaries in the income year.
This calculation may depend on the terms of the trust and general trust law principles: you may need to carefully consider the trust deed, the trust accounts and relevant resolutions to determine what the trust's distributable income is. Because this amount is determined in accordance with trust law principles and where applicable, the terms of the particular trust, it may be different to the accounting income of the trust or the net (taxable) income of the trust for tax purposes.
If the income of the trust estate is a loss amount, then enter '0' at A.
Subject to the application of Division 6E of the ITAA 1936 and the provisions relating to the streaming of capital gains and franked distributions, Division 6 of the ITAA 1936 broadly operates to assess beneficiaries who are presently entitled to a share of the ‘income of the trust estate’ and not under a legal disability on the same share of the net (taxable) income of the trust. This is commonly referred to as the ‘proportionate approach’ to trust taxation. Division 6 broadly operates in a similar manner to assess a trustee in respect of certain presently entitled beneficiaries who are under a legal disability or who were non-resident at year end. The balance of net (taxable) income not assessed to any beneficiary is generally assessed to the trustee.
For further information about present entitlement, the application of Division 6E and the provisions relating to streaming of franked distributions, read Is a beneficiary presently entitled to a share of the income of the income of the trust estate?
A beneficiary who is presently entitled to a share of the income of the trust estate shown here at A item 53 will have an amount recorded at W item 54 Statement of distribution.
Further guidance on the meaning of ‘income of the trust estate’ and the ‘proportionate approach’ to trust taxation
Bamford decision impact statement (DIS)
The 2010 High Court of Australia case of Commissioner of Taxation v. Bamford clarified the meaning of 'income of the trust estate' and 'share of income'. In response to the judgment the ATO released a decision impact statement. The key propositions contained in the DIS include:
- the income of a trust estate for trust law purposes and its income for tax purposes are two different subject matters which do not necessarily correspond
- in subsection 97(1) of the ITAA 1936 'income of the trust estate' takes its meaning from the general law of trusts and not from taxation law
- under the general law of trusts the concept of 'income' is governed by a set of rules designed to ensure that trustees fairly apportion the receipts and outgoings of a period between those entitled to income and those with an interest in capital
- the rules of apportionment adopted by the general law of trusts take the form of presumptions about whether particular receipts or outgoings constitute income or capital – the trust law presumptions can be displaced by express provision in the trust deed
- the apportionment of receipts and outgoings forms part of the processes in trust administration, whereby the 'surplus or distributable income' to which income beneficiaries may become presently entitled in respect of 'distinct year[s] of income' is ascertained (the 'distributable income').
Draft Taxation Ruling 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 was released on 28 March 2012. The draft ruling explains that the income of the trust estate is a reference to the income for trust purposes that a beneficiary could be made presently entitled to or a trustee could accumulate. This ruling may assist you in completing A item 53 and W at item 54.
The ruling is in draft form and while it sets out the Commissioner’s preferred view, it also contains alternative views which could, in appropriate circumstances, support a reasonably arguable position in the context of penalties. 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 the items. What you show at A item 53 and W at item 54 should be your honest determination of what the trust’s distributable income is, and each relevant beneficiary’s entitlement to that income by year end.
If you choose to calculate the trust’s distributable income based on one of the alternative views in TR 2012/D1, for example, according to a so-called ‘income equalisation clause’, this income is the amount you include at A item 53. Even if the Commissioner later takes the view that the trust’s distributable income is a different amount, you will not have made an error in your completion of this label.
Further explanation of the ‘proportionate approach’ to trust taxation in Division 6 of the ITAA 1936 can be found in Taxation Determination TD 2012/22 Income tax: for the purposes of paragraph 97(1)(a) of the Income Tax Assessment Act 1936 (ITAA 1936) is a beneficiary's share of the net income of a trust estate worked out by reference to the proportion of the income of the trust estate to which the beneficiary is presently entitled?
The TD contains practical examples which explain the relevance of the trust deed and the wording of the trustee resolution to the outcome which will arise under the proportionate approach.
- Bamford Decision Impact Statement
- Draft Taxation Ruling 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
- Taxation Determination TD 2012/22 Income tax: for the purposes of paragraph 97(1)(a) of the Income Tax Assessment Act 1936 (ITAA 1936) is a beneficiary's share of the net income of a trust estate worked out by reference to the proportion of the income of the trust estate to which the beneficiary is presently entitled?