Income tax

Legislative Framework

Taxation of trust income is governed by Pt III of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) as supplemented by Div 6E and Subdiv 115C of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) for capital gains and Div 207 for imputation credits. The main provisions are:

The main provisions of the relevant income tax provisions for trusts that are contained in Pt III of the ITAA 1936 are:

• • ss 95–102, which are the main taxing provisions;
• • ss 102AA–102AGA, which cover tax treatment of children in certain circumstances;
• • ss 102AAA–102AAZG, which cover non-resident trust estates;
• • ss 102M–102T, which cover income of certain public trading trusts;
• • ss 102UA–102UV, which cover income of certain closely held trusts;
• • ss 95AAA–95AAC, relating to the new tax treatment of trust capital gains and franked dividends; and
• • ss 102UW–102UY, being a new Div 6E, relating to the new tax treatment of trust capital gains and franked dividends.

Definitions and terms

The term “trust” itself is not defined by the legislation but some of the more important terms are:

• • trustee (s 6, ITAA 1936);
• • net income (s 95, ITAA 1936);
• • present entitlement (s 97, ITAA 1936);
• • legal disability (s 98, ITAA 1936); and
• • specifically entitled: ss 115-228, ITAA 1997.

Beneficiary presently entitled

A beneficiary who is presently entitled and who is not under a legal disability is subject to tax on his or her “share of the net income of the trust estate”. Trust income of the taxpayer is aggregated with the other income of the taxpayer.

The tax definition of income and the concept of income as understood by the law relating to trusts can be quite different.

No beneficiary presently entitled

Where no beneficiary is presently entitled:

• • trust income is taxed in the hands of the trustee at the maximum rate of 45% plus medicare levy of 2% (s 99A, ITAA 1936); and
• • taxation at concessional rates is possible if the Commissioner of Taxation is prepared to exercise his discretion not to apply the higher rates: s 99, ITAA 1936.

Deceased estates

Deceased estates are treated as trusts for tax purposes. Beneficiaries are not considered to be presently entitled to any of the assets of the deceased estate until estate liabilities have been discharged and the entitlement of the beneficiaries quantified.

See Income Tax.