Trusts
14. Income tax
Authors: Staff Legal Eagle
Firm / Chambers:
Last updated: 23 Sep 2015
- Whether a trust is obliged to pay tax depends on:
- the type of trust;
- whether any beneficiaries have received income from the trust; and
- the wording of the trust deed.
- For the purposes of tax law a trust business structure is not a separate taxable entity.
- Unlike companies which have shareholders a trust has beneficiaries who are entitled to distributions of capital and/or income. The trustee controls these distributions and they form part of a beneficiary's personal income. Distributions are therefore subject to income tax and provisional tax. Usually each beneficiary is liable to pay income tax on any distribution of trust income that is made to them.
- If in a particular year no beneficiary was entitled to any trust income the trustee pays the tax on the trust's net income. If this happens the tax is assessed at the highest individual rate which creates an incentive for distributions to be made.
- If a trust is carrying on a business all income, expenses, deductions and distributions must be shown on a tax return.
- In a unit trust where the units are fixed the trustee does not have discretion as to how and when to distribute trust income to the unit trust beneficiaries. This means the annual distributions have the potential to affect the income tax payable by various beneficiaries.
- With a discretionary trust the trustee can avoid creating additional tax burdens for beneficiaries by deciding not to make a distribution to them in a particular time period.
- Trust losses cannot be distributed to the beneficiaries. They can only be carried forward to offset against future income of the trust.
- The maximum tax rate for a unit or discretionary trust is generally the top marginal rate unless one of the beneficiaries under the trust is a company and certain other conditions also apply.
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