1. Can you explain how trust income & taxable income can be different?
The treatment of various income types for tax purposes can vary, and it is essential to consult a tax advisor. While certain trust deeds classify income as income, the tax regulations may lead to a distinct taxable amount.
For example – a trust receives franked dividends of $7,000 and has no other income or expenses. The trust income is $7,000. There are also franking credits attached of $3,000. So the trust’s taxable income is $10,000.
For example – a trust receives franked dividends of $7,000 and pays interest on a loan of $8,000. The trust income is negative $1,000 (ie. a loss). There are still franking credits attached of $3,000. So the trust’s taxable income is $2,000.
A more complicated example – a trust has a rental property loss of $3,000 and a gross capital gain of $7,000 (subjected to the CGT 50% discount).
The deed could exclude the capital gain from trust income or be silent about the meaning of trust income. As a result, the trust income could be negative $3,000 and have no income available for distribution. A remedy could be the trustee making beneficiaries specifically entitled to the capital gain instead of the trust being taxable and unable to claim the discount.
The deed could include the capital gain in trust income. As a result, the trust income would be $4,000, and the taxable income would be $500. For streaming to be effective, the trustee needs to make beneficiaries specifically entitled to the capital gain; otherwise, the capital gain is included in trust income and distributed proportionately.
The deed could equate trust income with taxable income, which would be $500. The exempt portion of the capital gain of $3,500 could then form part of trust capital. The trustee then needs to make a capital distribution and an income distribution to make the beneficiaries specifically entitled to all the capital gain.
2. Can the taxable half of the capital gain and the non-taxable discount be distributed to different beneficiaries?
No. Each beneficiary would be assessed on 50% taxable and 50% discount.
3. Can a separate discounted capital gain and a non-discounted capital gain be distributed to different beneficiaries?
Yes. If it is possible to identify the separate capital gains, they can be streamed to separate beneficiaries.
4. What if there are different classes of income and losses?
Example: where a trust has a rental property loss, management/administration expenses, franked dividends, and/or a capital gain. How is the amount of the net franked dividends and/or net capital gain that is distributed calculated?
Tax law operates to reduce the taxable portion on a pro-rata basis by calculating a “rateable reduction percentage” as follows:
Taxable income of the trust (excluding franking credits)
Net franked dividends and net capital gain
- Which is then applied to the gross capital gain and/or franked dividends to reduce the amount that can be distributed.
Feel free to contact your client manager to clarify any of these points.
Kreston Stanley Williamson Team
*Correct as of April 2017
*Disclaimer – this article has been produced by Kreston Stanley Williamson as a service to its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.