Question

QUESTION 2

The Hickey Family trust, established under Australian law, has the following income for the year ended 30 June 2020:

• Australian sourced business income                                                               $100,000
• United States sourced business income                                                          $50,000
• Capital gain on property held for 5 years                                                       $60,000

Assume there are no allowable deductions for the year ended 30 June 2020.

The three beneficiaries of the trust are:

• Earl – A 50 year old United States Resident who is not under a legal disability
• Randy – Earl’s 48 year old brother who lives in Australia and is under a legal disability.
• Joy – Earl’s ex-wife, a 40 year old Australian resident who is not under a legal disability and has a carried forward capital loss of $20,000

REQUIRED

B) What is the net income of the trust for the year ended 30 June 2020?

b) Advise the trustee of the most tax effective way to distribute the trust income for the year ended 30 June 2020.

Make sure you explain your answer.

You are not required to perform any calculations to answer this question.

Answer 1

A trust is an obligation imposed on a person or other entity to hold property for the benefit of beneficiaries. While in legal terms a trust is a relationship not a legal entity, trusts are treated as taxpayer entities for the purposes of tax administration. Trusts are widely used for investment and business purposes. The trustee is responsible for managing the trust's tax affairs, including registering the trust in the tax system, lodging trust tax returns and paying some tax liabilities.

The net income of a trust (effectively its taxable income) is its assessable income for the year less allowable deductions worked out on the assumption that the trustee is a resident (even if the trustee is actually a non-resident). Because the income of a trust is determined in accordance with the trust deed and its net income is determined in accordance with tax law, the two amounts are often different.

a. Computation of net income of the trust

Australian sourced business income= $100,000

United States sourced business income=$50,000

Capital Gain on property= $60,000

Total income of thr trust= $210,000

(-) Deductions=0

Total Net income of the trust= $210,000

b. Distribution of tax among trust members

Tax to be paid by Earl

Earl is a 50 year old US resident who is not under legal disability

Where the beneficiary is a non-resident, and presently entitled to trust income, then the trustee pays tax for the beneficiary:

• At the beneficiary’s tax rates: ss98(2A), 98(3) on the net income of the trust attributable to Australian sources
• If the beneficiary is a trustee of another trust which has a non-resident trustee: s98(4), then the trust pays tax on the beneficiary’s share at 45% (47% for the next 3 years).

The beneficiary’s portion of trust income is to be included in their assessable income, and a tax credit will be given for the tax paid by the trustee (s98A).

Tax to be paid by Randy

Randy is an austrilian citizen and is legally disabled

Any part of a trust's net income to which a resident beneficiary is presently entitled is taxed in the hands of the beneficiary at that beneficiary's marginal rate of tax.

Tax to be paid by Joy

Joy is arl’s ex-wife, a 40 year old Australian resident who is not under a legal disability and has a carried forward capital loss of $20,000. Any part of a trust's net income to which a resident beneficiary is presently entitled is taxed in the hands of the beneficiary at that beneficiary's marginal rate of tax. Her carried forward capital loss will be reduced from her income to determine her marginal tax rate