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ACCG924 S2 2018 Lecture 9
ACCG924 S2 2018 Lecture 9
ACCG924 S2 2018 Lecture 9
Readings from Australian Taxation Law 2018 for this week’s lecture
Taxation of minors
W21-010 to 21-050
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Taxation of trust income
Division 6 Pt III s 95 to 102 ITAA1936
Nature of a trust
Being under a fiduciary obligation means that the trustee must act according to
the terms of the trust and must not personally benefit
The trustee may hold the legal title to trust property (eg, the trustee’s name is on
the trust bank account), but is compelled in equity to deal with it according to
the terms of the trust – means the beneficiaries may enforce their rights in
court.
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Taxation of trust income
Trusts may be inter vivos trusts (between living persons) or testamentary trusts
(set up on the death of a person).
A trust is not a separate taxable entity – is the relationship between the trustee
and the beneficiaries
Generally, it is the beneficiaries who are liable to pay tax on the trust income.
However, the trustee may be liable to pay tax:
-- on behalf of a beneficiary where a beneficiary is under a legal disability or is
not a resident, or
-- where income is accumulated in the trust.
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Taxation of trust income
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Taxation of trust tncome
Trustee of a discretionary trust must apply the trust income according to the
trust deed but otherwise has a discretion as to how it is distributed – this
means the beneficiaries are not presently entitled because they cannot
demand payment -- they are, however, deemed to be presently entitled
when the trustee exercises the discretion in their favour (s 101)
No definition in the legislation, but generally means a person who cannot give a
valid discharge when payment is made to them, and so someone else has
to act on their behalf
Most common:
-- persons aged under 18
-- persons of unsound mind
-- persons who are bankrupt
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Taxation of trust income
Section 97 ITAA36: a beneficiary pays tax on trust income if the beneficiary is:
-- presently entitled to the income
-- not under a legal disability, and
-- a resident.
Trustee gives the beneficiary the full amount of trust income to which they are
presently entitled and the beneficiary pays tax on the income at ordinary tax
rates.
Beneficiaries are taxed on the income to which they are presently entitled even
if the trustee has not distributed that income to them by the end of the year
in which it is derived.
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Taxation of trust income
When is the trustee liable to pay tax on behalf of the beneficiary?
Section 98 ITAA36: the trustee pays tax on behalf of the beneficiary (takes tax
out then gives the beneficiary the amount remaining) in two situations.
1. where the beneficiary is presently entitled to the income but is under a legal
disability
2. where the beneficiary is presently entitled to the income but is not a resident
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Taxation of trust income
Example at W17-120
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Taxation of trust income
A trust is not a taxable entity – its net income is simply determined for calculating
the tax liability of the beneficiaries or the trustee.
The net income of a trust is the total assessable income of the trust calculated as
if the trustee were a resident taxpayer in respect of that income, less all
allowable deductions (s 95(1)).
The calculation requires both Australian and foreign-source income and related
deductions to be taken into account.
Losses may be carried forward and offset against the assessable income of the
trust estate in the following year of income – but only if the trust loss tests in
Sch 2F ITAA36 are satisfied. The trust loss tests are not examinable.
If the trust loss tests are not satisfied, the losses are trapped in the trust.
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Taxation of income of minors
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Taxation of income of minors
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Taxation of income of minors
The low income offset cannot reduce tax on eligible taxable income, but can
reduce tax on excepted assessable income.
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Taxation of income of minors