Question

Tutorial: Trusts

1.         X’s will created a trust under which the income is to be distributed as follows:

To his widow                                                 - 50%

To his 25 year old insane son                   - 25%

To be accumulated for the benefit of his 17

year old daughter to vest upon her attaining

the age of 21                                                 - 25%

The trustee also has a discretion to pay or apply part or all of the daughter’s share of the income for her education, welfare, betterment or advancement in life.

During the last tax year the trust had net income of $50,000. The trustee paid $7,500 towards the cost of the daughter’s education.

The widow received, as other income, net rents of $10,000. The son received $15,000 under a trust created by his grandfather’s will and the daughter earned $3,750 from working part time in a cafe.

Who is assessable on the income of the trust estate? Indicate the basis upon which they would be assessed and calculate the taxable incomes (indicating any entitlements to credits) of the widow, son and daughter.

2          Jack creates a trust under which the beneficiaries are his two infant children. The children both receive distributions. How may the Commissioner assess those distributions? How might Jack avoid this result?

3          Under the terms of the Golf family trust (which earns half of its $160,000 income from Australian sources (business profits from a permanent establishment) and the balance from overseas sources), 25% of the trust's income is to be paid to Harry Golf, a 24 year old accountant in practice in Townsville. An additional 25% is paid to Ian Golf, Harry's 17 year old brother who lives in New Zealand with his mother and the balance is to be paid, at the trustee's discretion, to Jim Golf, a cousin who has been an Australian resident since he turned 21 on 31st December last year. The trustee did in fact exercise his discretion in Jim's favour and decided to pay him the same amount that Harry and Ian were receiving. The trustee retained the balance of the trust's income for reinvestment.

           

            Who will be taxed, on what amounts, at what rates and subject to what credits

           (if any)? Provide detailed reasons for your answer.

Answer 1

1. The trust mentioned in the case above is a Private Specific Trust because the share of each member is determinate in deed. Hence, the provisions of same shall apply. Hence, the taxability should be done in the hands of individuals. Hence, the individual beneficiaries are assesable on the income of the trust. The basis of taxaility would be the % of share of beneficiary in the trust. Accordingly, as the trust had net income of $ 50000 in previous year. Hence, the taxable income of Widow would be 50% OF $ 50000 i.e $ 25000 plus $ 10000 as rent as other Income. The taxable income of son would be 25% of $ 50000 plus $ 15000 received as share from another trust. Hence, the taxable income of son would be $ 27500. The daughter's taxable income would be $ 3750 received from working part time in a cafe. The share of daughter of $ 12500 from trust would not be taxable in the hands of daughter but it would be taxable in the hands of trust.