Trust Tax Return
Trusts are commonly used for both investment and business purposes due to their flexibility and structure.
What is a Trust?
A trust is a legal arrangement where one person or entity (the trustee) holds property or assets for the benefit of others (the beneficiaries). While a trust itself is not a separate legal entity, for tax purposes it is treated as a distinct taxpayer.
The trustee is responsible for managing the trust’s tax obligations. This includes registering the trust with the tax authorities, lodging the trust tax return, and paying any tax liabilities. Beneficiaries (with some exceptions, such as certain minors and non-residents) report their share of the trust’s net income in their own tax returns. Different rules may apply depending on the type of trust, such as family trusts, deceased estates, and superannuation funds.
Trust Income
The net income of a trust—essentially its taxable income—is calculated by subtracting allowable deductions from its assessable income for the year. This calculation assumes the trustee is a resident for tax purposes, even if they are not.
The distribution of income is determined by the trust deed and tax law. Generally, the trust’s net income is taxed in the hands of the beneficiaries according to their share of the income, regardless of whether they have actually received the payment. For example, if a beneficiary is entitled to 50% of the trust income, they will be assessed on 50% of the trust’s net income. This method is known as the proportionate approach. There are special considerations for franked distributions and capital gains within the trust income.
A beneficiary is considered presently entitled to trust income if, by the end of the income year, they have an immediate right to demand that income from the trustee. The trust deed and the trustee’s discretion influence how income is allocated among beneficiaries. The trustee must provide beneficiaries with details of their income share so they can correctly report it in their tax returns.
Capital Gains and Losses in Trusts
When a trust disposes of an asset or experiences another capital gains tax event, it may incur a capital gain or loss, unless a beneficiary is absolutely entitled to that asset.
- Net capital gains are included in the trust’s net income.
- Net capital losses are carried forward to offset future capital gains.
Capital gains are allocated to beneficiaries based on their entitlement to trust income unless:
- A beneficiary is specifically entitled to the capital gain, or
- The trustee of a resident trust opts to pay tax on the capital gain themselves.
This option to pay tax on the capital gain allows trustees to manage situations where beneficiaries don’t immediately receive the gain, provided the trustee hasn’t allocated or paid the gain amount to beneficiaries within two months after the income year ends.
If no beneficiary is entitled to the income or capital gain, the trustee must pay tax on the gain. In this case, if the trustee is taxed at the highest marginal rate, they are not eligible for the capital gains tax discount on that gain.
If you need help preparing your trust tax return or understanding your tax obligations as a trustee or beneficiary, our experienced team is here to assist. Contact us for expert advice tailored to your trust’s needs.