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Understanding tax for trusts

A trust is an arrangement where a person or company holds assets on behalf of one or more beneficiaries. It is often used for asset protection, investment purposes, or for estate tax planning. While a trust is technically a relationship among trustees and beneficiaries, not a legal entity, they are treated as taxpayer entities for the purposes of tax administration.

Discretionary trusts – sometimes known as family trusts in Australia – are the most commonly used trust by business owners, and are governed by specific criteria set out in a legal document, known as the trust deed. Types of assets commonly held in trusts can include:

What are trustees and beneficiaries?

The trustee is the person or company responsible for managing the trust’s tax affairs, which includes registering the trust in the tax system, lodging trust tax returns, and paying some tax liabilities.

The beneficiary is the person – or people – who benefit from the trust arrangement. For example, in a trust set up to financially protect a family’s assets, the beneficiaries would be the family members named in the trust deed. Beneficiaries may be entitled to trust income or capital as set out in the trust deed, or at the discretion of the trustee.

Trustees and beneficiaries – and the trust itself – have separate tax obligations. These obligations depend on how the trust income is proportioned.

Trustee responsibilities

The trustee registers for the trust’s tax file number (TFN) in their capacity as trustee, which is used in filing the trust’s income tax returns. The trustee may also need to register for an Australian Business Number (ABN) if the trust is carrying on an enterprise.

Trustees must lodge a trust income tax return with the Australian Taxation Office (ATO), regardless of the trust’s net income.

A trustee themselves may be liable for tax, for which they will receive an income tax assessment as trustee. This is separate to their own individual or corporate income tax assessment. They will only need to do this if any part of the trust’s income hasn’t been apportioned to a beneficiary, in which case the trustee will be taxed on this proportionate share at the highest marginal rate.

If a beneficiary of the trust is not an Australian resident, or a minor, the trustee must withhold tax and pay it to the ATO as required.

Beneficiary responsibilities

A beneficiary is taxed based on their share of the trust’s net income that they are ‘presently entitled’ to – that is, the amount they have the right to demand payment for in that financial year.

A beneficiary will need to know their proportionate share, and include this in their individual tax return. Depending on their expected tax liability, they may also need to pay tax instalments throughout the year via the pay-as-you-go (PAYG) instalment system.

If a trust holds an asset for at least 12 months, it’s eligible for the 50% capital gains tax (CGT) concession on gains made in that financial year. This discount flows through to beneficiaries who have absolute or specific entitlement on the trust asset.

Learn more: Section 100a of the Income Tax Assessment Act 1936

Closely held trusts: A special case

Additional withholding and reporting requirements apply for closely held trusts. A closely held trust is a trust where 20 or fewer individuals have between them – and benefit from – fixed entitlements to 75% or more of the income or capital of the trust. For tax purposes, a discretionary trust is a closely held trust.

The trustee of a closely held trust must withhold tax from payments to beneficiaries who have not provided their TFN to the trust. In addition, details of beneficiaries who are entitled to a share of the income or a tax-preferred amount (or both) must be provided to the ATO.

Furthermore, a trustee beneficiary non-disclosure tax may be payable in either of the following circumstances:

  • The trustee of a closely held trust does not lodge a correct trustee beneficiary (TB) statement with the ATO within the specified period.
  • A share of the net income of a closely held trust is included in the assessable income of a trustee beneficiary, and the trustee of the closely held trust becomes presently entitled to an amount that can be reasonably attributed to a part of, or the whole, untaxed part of the share.

If you’re thinking about establishing a trust, you should first seek legal and financial advice to determine the most suitable type of trust, confirm beneficiaries and set out criteria needed for the trust deed. It’s also advised you speak to professional tax advisor to understand your tax obligations.

Learn more about tax for the self-employed or if you’re running a small business here.

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