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  • Trust income

    The net income of a trust (effectively its taxable income) is its assessable income for the year less allowable deductions worked out on the assumption that the trustee is a resident (even if the trustee is actually a non-resident).

    Because the income of a trust is determined in accordance with the trust deed and its net income is determined in accordance with tax law, the two amounts are often different.

    Generally, the net income of a trust is taxed in the hands of the beneficiaries (or the trustee on their behalf) based on their share of the trust's income (that is, the share they are 'presently entitled' to) regardless of when or whether the income is actually paid to them.

    For example, if the beneficiary has a 50% share of the trust's income, they are assessed on a 50% share of the trust's net income. This is referred to as the proportionate approach.

    Special rules apply to franked distributions and capital gains included in the trust's net income.

    A beneficiary is presently entitled to trust income for an income year where they have, by the end of that year, a present or immediate right to demand payment from the trustee. The entitlement will depend on the trust deed and any discretion that the trustee has under the deed to allocate income between beneficiaries.

    The trustee will need to provide each beneficiary with details of their share of the net income, so that the beneficiaries can include this amount in their tax returns.

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    Tax rates

    Adult and company beneficiaries pay tax on their share of the trust's net income at the tax rates that apply to them.

    The trustee pays tax on behalf of non-resident beneficiaries and those who are minors, based on their share of the trust's net income. These beneficiaries may need to declare their share of the trust's net income in their own income tax returns, and can claim a credit for the tax paid on their behalf by the trustee.

    Higher rates of tax apply to most trust distributions to minors (see Your income if you are under 18 years old).

    If there is any part of the trust's income for which no beneficiary is presently entitled, the trustee is taxed on the corresponding share of net income. If there is no trust income the trustee is taxed on any net income.

    The trustee is generally taxed on the trust income at the highest marginal rate that applies to individuals except for some types of trusts (including deceased estates), which are taxed at modified individual rates.

    Franked distributions

    Unless prevented by the trust deed, a beneficiary may be made specifically entitled to a franked distribution, resulting in the beneficiary being taxed on the franked distribution. In this way, franked distributions can be streamed to particular beneficiaries for tax purposes.

    If no beneficiary is specifically entitled to a franked distribution, it's taxed proportionately to all beneficiaries based on their entitlement to the trust income (with some modifications) – that is, in much the same way as the other net income of the trust.

    If a beneficiary qualifies for a franking credit offset, they are also required to include the amount in their assessable income.

    If the trust is not a family trust, a beneficiary without a fixed entitlement to the franked distribution is generally not entitled to use the associated franking credits unless their total franking credits from all sources for a year is $5,000 or less.

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    A loss made by a trust in an income year can't be distributed to beneficiaries. However, it can be carried forward and used to reduce the trust's net income in a later year.

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    Last modified: 24 Jan 2019QC 23087