Trusts and beneficiaries

Taxation of beneficiaries
1. Non-Resident Beneficiaries
  1. not under legal disability
  2. share of net income (exclude foreign sourced income) taxed at non-resident rates: ss 98(2A) & (3)
2. Minor Beneficiaries
  1. Distributions from trusts taxed at top marginal rate + medicare levy
    1. Div 6AA ITAA97
    2. 2014/15 resident minors rates:
      1. $0 - 416: Nil tax rate
        $417 - 1,307: 66%
        $1,308+ : 45% of whole Div 6AA income
      2. Exempted minors from Div 6AA: Full time employment + Disabled children s 102 AC (2)
3. Preservation of income character
  1. Divds distributed to beneficiary can carry imputation credit
  2. Capital gains distributed to indiv beneficiary can claim CGT disc
Taxation of trusts
1. Scenarios
  1. #1 Presently entitled to trust income, not under legal disability
    1. pays under s 97
  2. #2 Presently entitled to trust income, under legal disability
    1. trustee pay on behalf, at tax of beneficiary: s 98
      1. beneficiary entitled to deduction for tax paid by trustee s 100(2)
        net income treated as no deductions avail
  3. #3 No beneficiary presently entitled
    1. Trustee taxed at penalty rate of top marginal indiv rate + medicare levy of 47%: s 99A
      1. exception: if trust from will & commissioner of option that is unreasonable to apply penalty rate: s 99
        taxed at trustee normal indiv rate
2. Net income/loss of trust s97
  1. Income of trust estate
    1. Defined in trust deed, excludes capital gains
  2. Net income of trust
    1. Taxable income calculated to s 95(1) ITAA36, includes capital gain
  3. Share: Adopt proportionate view, not quantum view
    1. Commissioner of Taxation v Bamford [2010] HCA 10
3. Summary
  1. #1 Net income/loss of trust
    1. if net income
    2. If net loss
      1. Loss trapped in trust
  2. #2 Any beneficiaries presently entitled to trust income
    1. if net income
    2. Yes
    3. No
      1. Trustee pays s 99 or s 99A ITAA36
  3. #3 Is the beneficiary presently entitled to trust income under legal disability
    1. No
      1. Beneficiary pays under s 97 ITAA36
    2. Yes
    3. Yes
      1. Trustee pays on behalf of beneficiary under s 98 ITAA36
4. Beneficiary is presently entitled if
  1. Interest in income both vested in interest and possession
  2. Present right to remand and receive payment of income
    1. Harmer v FCT (1991)
  3. Unnecessary to have knowledge of distribution
    1. Vegners v FCT (1991)
5. Legal disability
  1. s97 does not apply
  2. cannot give discharge to trustee for pmt made to them
    1. eg. minors, undischarged bankrupts, intellectually impaired
CGT events for trusts
1. 9 CGT events relating to Trust
2. E4 occurs if unit trust (not discretionary trust) makes payment not regarded as assessable income to beneficiary
  1. Capital gain = non-assessable receipts > cost base of units
What is a trust?
1. not a separate legal entity
  1. but relationship between Trustee and Beneficiaries
    1. Trustee: Owner and manages trust property for beneficiaries
    2. Beneficiaries: Receives distribution from trustee
2. Types
  1. Bare trusts: Informal & Verbal (Asking someone to hold property on behalf)
  2. Express trusts: Formal with a trust deed (Rights & Obligations)
  3. Fixed trusts: Predetermined entitlements of beneficiaries to income and capital by terms of trust deed
    1. Trustee no discretion to change fixed entitlement
    2. Proprietary interest in trust property held by beneficiaries
    3. Case study: 2013 Charles v ATO
    4. Predetermined entitlements of beneficiaries to income and capital by terms of trust deed
    5. eg. No. of units held by each beneficiary typically corresponds to the contribution made to trust
    6. Common fixed trusts are unit trusts
      1. Beneficiaries hold "units" in trust
  4. Discretionary trusts: Absolute discretion to allocate trust income/capital to beneficiary
    1. Life of 80 years
    2. aka Family trusts: Good to distribute income between family
    3. Asset protection: Protected even if bankrupt
    4. Beneficiaries have no entitlement until trustee decides
    5. Establishment & operations
      1. #1 Main beneficiary appoints trustee as an "appointor"
        #2 Establishment of trust: Settlor makes initial cash contribution & execute trust deed
        #3 Trustee operates the trust
        #4 Trustee distributes income to beneficiaries
  5. Testamentary trusts: Created under a will
    1. Can be fixed trust or discretionary trust
      1. Beneficiaries: Widow(er), (Grand)children
Div 6 ITAA 36

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Trusts and beneficiaries

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