Question

Rosa and Sam Costello are the only two beneficiaries of a discretionary trust created by their father during his lifetime. Rosa aged 23 years resides in Italy and is a non- resident for Australian tax purposes. Sam aged 16 years is a resident of Australia.

During the 2019/20 tax year the trustee received a dividend of $6,300 (net of tax) from a company resident in Italy, on which withholding tax of 10% had been deducted at source, and a fully franked dividend of $8,800 from a resident Australian company. The trustee resolved to distribute the income equally among the two beneficiaries.

Advise the Australian income tax liability of both beneficiaries (Rosa and Sam) on the distributions for the 2019/20 tax year. Do NOT make a distribution table, do not calculate tax amounts but must clearly state the following.

Trust net income; whether or not the beneficiary is presently entitled; whether or not the beneficiary is under a legal disability (with reasons); which sections of the ITAA apply to make the income assessable; who is assessed on each amount; and tax rate applicable to each amount.

Answer 1

Answer:

Generally, the net income of a trust is taxed to beneficiaries of the trust under section 97.

Minor

Because Sam Costello is under 18 years of age, the trustee is assessed and is liable to pay tax on that income as if it were the income of an individual. Sam is generally is taxed at the highest marginal tax rate.

The minor's tax rate is applicable.

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Foreign resident

However, trustees will be taxed in relation to Rosa because she is non-resident beneficiary. This assists in the collection of Australian tax on relevant income.( section 98)

The rate of tax that a trustee pays in relation to a non-resident individual beneficiary that is not a trustee are foreign resident tax rates.

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Net income

The trust's net income will be the total of $18,871.43

Fully franked dividend of $8,800

Franking credit of $3,771.43

Foreign income of $6,300

.

Both Rosa and Sam Costello are presently entitled because trustee resolved to distribute the income equally between the two.

Neither Rosa nor Sam Costello are legally disabled, this is because none of them are experiencing challenges like bankruptcy or in prison or even having any of legal challenges.

.

Franked dividends

Rosa and Sam Costello will need to includes both the amount of the dividend and the franking credit in the trust's assessable income when calculating the trust's taxable income or loss.

they should also include in their tax returns, their portion of the trust income and their portion of the franking credit. (Section 95 of the Income Tax Assessment Act 1936)

They are entitled to a tax offset equal to their portion of the franking credit if all other eligibility tests are met.

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Foreign income tax

If foreign income tax has actually been paid by the trust, then Rosa and Sam Costello may be able to claim a foreign income tax offset in their individual tax returns.