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| Trusts |
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Terminology
Settlor The settlor is also called the creator, and is the person who creates the trust. Trust Property Trust property is the assets of the trust. It may consist of money, real estate, shares, or personal property. Trustee A trustee is the person holding the trust property under the terms of the trust. The trustee may be a person or a company. The legal title to the trust property is held by the trustee who owes a duty of care to the beneficiaries in relation to that property. Beneficiaries Beneficiaries are the persons, objects or purposes nominated to receive the benefit of the trust property. A beneficiary does not have to be a person e.g. a trust could be established for the purpose of feeding and caring for a particular dog. Corpus Corpus is the capital or equity of the trust. Trust Deed A trust deed is the written document that sets out various matters relating to the trust e.g. name of the settlor, trustee, beneficiaries, powers of the trustee, etc. Trust Estate Trust estate is the term used to describe the trust property from which income is derived. Present Entitlement For a beneficiary to be presently entitled to trust income the following two conditions must be satisfied:
Legal Disability Legal disability exists in a number of situations. These are where a beneficiary is:
Also, a legal disability arises where a beneficiary cannot demand his share of trust income because of a condition of the trust instrument e.g. a will may prevent an 18 year old from receiving his share of trust income until he turns 21 years of age. Dividends Franking credits are included in the calculation of s.95NTI Capital Gains/Losses Capital gains/losses are included in the calculation of s.95NTI Trust Losses Trust losses are not distributed to the beneficiaries, and therefore cannot be offset against income which the beneficiary may derive from other sources Deceased Estates The trustee of a deceased estate is generally required to file an I return for income derived by the deceased up to the date of death The trustee must file a Form T for the income derived by the deceased estate after the taxpayer’s death As a rule, assessable income accrued at the date of the taxpayer's death, but which is received after that date is assessable to the trustee under s.101A ITAA36 Any income derived by the trust estate is regarded as income to which no beneficiary is presently entitled and is assessed under s.99 or s.99A ITAA36 (usually s.99 - at ordinary tax rates) until the administration of the deceased estate is complete. |
| Types of Trusts |
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A trust is not a legal entity in its own right, but
a relationship between a trustee and beneficiaries. It may be
described as a duty imposed upon a person (trustee) to hold trust
property or income for a particular purpose, or for the benefit of others
(beneficiaries).
Deceased estate A ‘deceased estate’ is a trust in which the trustee administers the trust property in the best interests of the beneficiaries. For tax purposes, the executor or administrator of a deceased estate is the trustee. This trustee is responsible for the collection of the deceased's assets, payment of any outstanding debts, and the distribution of the balance of the trust estate to the beneficiaries in accordance with the terms of the will or legislation (if no will) Fixed trust A trust in which persons have fixed entitlements – as defined in section 272-5 of Schedule 2F to the ITAA 1936 – to all of the income and capital of the trust at all times during the income year. Under the terms of the will or trust instrument, the beneficiaries receive specific proportions of the trust estate. The trustee has no authority to vary these proportions. Hybrid trust A trust which is not a fixed trust but in which persons have fixed entitlements – as defined in section 272-5 of Schedule 2F to the ITAA 1936 – to income or capital of the trust during the income year. Discretionary trust These trusts are used to accumulate income with the aim of minimising tax. The trustee has the discretion to vary proportions passed on to beneficiaries, or even vary the beneficiaries. Discretionary trusts are a very flexible means of splitting income between family members as the trustee decides who receives income, when and how much. Fixed unit trust A fixed trust in which interest in the income and capital of the trust are represented by units. Unit trusts are a variation of fixed trusts. The beneficial ownership of the trust property is divided into a number of fixed units e.g. property and cash management trusts Inter vivos trust A trust created during the life of the settlor and operates during that period e.g. a discretionary trust established to conduct family business TAXATION OF TRUSTS MTG 6-020 & 6-060 A trust is not a separate taxable entity. However, a Trust tax return (Form T) must be lodged for a trust estate irrespective of the amount of income derived by the trust. A Trust tax return requires the completion of a Statement of Distribution which shows for each beneficiary:
Net Trust Income Assessable Income - Deductions = Net Trust Income S99A of the 1936 Act relates to NTI of an inter vivos trust for which there is no present entitlement. Liability to pay tax The Trustee is liable to pay tax if:
Discretionary payments Under s.101 ITAA36 where a trustee is given discretionary power to make payments out of trust income to benefit a beneficiary (e.g. school fees, medical expenses), such payments are deemed to be distributions of income to which the beneficiary is presently entitled These payments are assessed by:
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