How is Trust income treated?

The net income of a trust is basically its taxable income. It’s calculated by subtracting allowable deductions from the trust’s assessable income for the year. This calculation assumes that the trustee is a resident, even if they’re actually a non-resident.

The income of a trust, as stated in the trust deed, and its net income, calculated according to tax law, can be different.

Usually, the net income of a trust is taxed based on the beneficiaries’ share of the trust’s income. This is true regardless of whether or when the income is actually given to them. For example, if a beneficiary has a 50% share of the trust’s income, they’ll be taxed on 50% of the trust’s net income. This is called the proportionate approach.

Special rules apply if the trust’s net income includes franked distributions or capital gains.

A beneficiary is considered “presently entitled” to trust income for an income year if they have the right to demand payment from the trustee by the end of that year. This depends on the trust deed and any discretion the trustee has, to allocate income between beneficiaries.

The trustee needs to give each beneficiary details of their share of the net income so that they can include it in their tax returns.

See also: Resolutions checklist

Trust income rates

Adults and companies pay taxes on their part of the trust’s net income at their own tax rates.

The trustee handles taxes for non-resident beneficiaries and minors by paying them on behalf of these beneficiaries. They’re taxed based on their share of the trust’s net income. These beneficiaries might need to report their share of the trust’s net income on their own tax returns and can get a credit for the tax paid by the trustee.

Most trust distributions to minors are taxed at higher rates.

If there’s any part of the trust’s income that no beneficiary is entitled to at the moment, the trustee is taxed on that part of the net income. If there’s no trust income, the trustee is taxed on any net income.

The trustee is usually taxed on the trust income at the highest individual tax rate, except for certain types of trusts, like deceased estates, which are taxed at different individual rates.

Franked distributions

Unless the trust deed prohibits it, a beneficiary can be designated as specifically entitled to a franked distribution, which means the beneficiary will be taxed on that distribution. This allows for the directed allocation of franked distributions to specific beneficiaries for tax purposes.

If no beneficiary has a specific entitlement to a franked distribution, it is typically taxed proportionately among all beneficiaries based on their share of the trust income, similar to other income from the trust, with some adjustments.

If a beneficiary qualifies for a franking credit offset, they must also include the amount in their taxable income.

For trusts that are not family trusts, beneficiaries who do not have a fixed entitlement to the franked distribution are generally not allowed to utilize the associated franking credits, unless their total franking credits from all sources for a year amount to $5,000 or less.

See also: Tax treatment of trust franked distributions, Streaming trust capital gains and franked distributions, and Resolutions checklist.

Trust losses

A trust cannot distribute losses to beneficiaries in the current income year. Instead, the loss can be carried forward to future years to offset against the trust’s net income.

See also: Trust loss provisions