Question

A Discretionary Family Trust with Gross income of 123000,and 3000 deductible exp with following members and their share as per deed:

• Gillian, aged 25, and married;- 20%
• Jeff, aged 23, certified insane and is confined to institution; - 20%
• Simon, aged 19, a university student; - 25% (He also got wages 5700 and PAYG witheld 800 , in university vacation)
• Louis, aged 16, s secondary student; - 25%
• Boris, aged 4.- no fixed %, at the discretion of Trust, spent 7000on his medical exp

Calculate : s. 95 net trust income , shae to each member and their tax payable

Answer 1

If the individual shares of income in a private trust is known, the income is taxed in the hands of the respective beneficiary. As income-tax rules mandate the liability to pay tax on trustees, the tax can be levied and recovered from a representative assesse i.e. the trustee.

But the same rule does not apply to the discretionary trust where the share of income is not defined, and trustees decide the distribution of the same among the beneficiaries. The income of such a trust is assessed in the hand of the trustees as per the tax bracket under which they fall.

The above taxability rule applies when the income source of the trust is only from its assets. The situation is different when a trust has other sources of income, including a business.

Therefore in the above case following is the taxability :

1. Net Income = Gross Income 123000 Less Deductible expenses 3000 Less 7000 (Medical expenses spent on minor whose share is will be taxable in the hands of trust)

= 113000

2. Share of each member for taxation purposes :

Gillian -- 20% share of 113000 = 22600

Jeff --20 % share = 22600

Simon ---25% = 28250 (Being independent)

Louis Minor so taxable in the hands of senior most trustee or trust income 25%

Boris Minor so medical expenditure 7000 can be claimed as deduction in hands of trust

3) Tax will be payable as per the basic exemption limit of individual member here will be Gillian, Jeff, Simon.

However tax will pe payable as per Maximum Marginal Rate in case of trust income of 39550 after giving share to members above.