Distribution to Minors

[Gogo72]

Just got off the phone from ATO and they said if a discretioanry trust distributes $2667 to a beneficiary (under 18 - minor) and has no other income, the beneficiary is not liable to pay tax due to the low income rebate.

However, the trustee is liable to pay the tax above $416 under section 98(1). Is that correct?

Given that the beneficiary, is not liable to lodge a tax return, you can't recoup the tax liability from the trustee.

Something seems wrong with this approach?

Regards
Stressed

 

[Jonathon]

Yes the $2,667 figure is right, due to the low income tax offset thingy, or whatever its called...I'm not fully up to speed with all the various low income allowances that the government tinkers.

The limit I believe goes up to $3,000 for FY10.

I'm not sure about the reference to S. 98(1), presumably it jsut hasb't been updated to reflect the tax offset, but everybody I know who has a DT distributes the $2,667 to each of their kids.

 

[Gogo72]

i have been told that the minor must apply for a tax file number and lodge a tax return to receive the credit of tax paid by the trustee for the same income.

It seems a very long winded method - is there any Tax Statements that anyone knows of which says this can be avoided or must I now apply for a TFN for each and every minor, my trust will distribute to?

 

[Pushka]

I dont think it is correct. We were advised that Trust Distributions do not qualify for the Low Income threshhold as they are not 'legitmate income'. At the time (a few years ago now as the kids are now adults) there was a limit of I think, around $600 per minor. After that, their tax rate was 46% and NO rebates available.

Our kids didnt have a TFN until they started actually earning a real income.

 

[Gogo72]

I dont think it is correct. We were advised that Trust Distributions do not qualify for the Low Income threshhold as they are not 'legitmate income'. At the time (a few years ago now as the kids are now adults) there was a limit of I think, around $600 per minor. After that, their tax rate was 46% and NO rebates available.

Our kids didnt have a TFN until they started actually earning a real income.

unfortunately its correct. kids need to lodge a tax return if the trustee is assessed under s 98(1) when a distribution is made to minor.

in practise though, i dont think the ato will issue such a notice of assessment to the trustee.

 

[Pushka]

unfortunately its correct. kids need to lodge a tax return if the trustee is assessed under s 98(1) when a distribution is made to minor.

in practise though, i dont think the ato will issue such a notice of assessment to the trustee.

No, not that bit. The bit about being able to use low income offets to reduce tax liabilities for distributions to minors.

Unless the laws have changed, my kids received distributions (but under $600) without a TFN. Perhaps you need a TFN if they receive more than that amount. But distributing more than that amount is counterproductive because their tax rate is going to be around 48% and no low income offset.

 

[Ebbie]

http://www.ato.gov.au/individuals/content.asp?doc=/content/20046.htm

Income of minors
A minor is a person who is under 18 years of age. Special rules apply to the income of minors.

Under these rules, certain types of income received by minors may be taxed at higher rates.

However, minors who are residents of Australia do not have to lodge a tax return if they earn less than $2,667 in 2008-09. This is because the low income tax offset of $1,200 offsets the tax payable on income less than $2,667.

Last Modified: Tuesday, 30 June 2009

 

[Pushka]

http://www.ato.gov.au/individuals/content.asp?doc=/content/20046.htm

Income of minors
A minor is a person who is under 18 years of age. Special rules apply to the income of minors.

Under these rules, certain types of income received by minors may be taxed at higher rates.

However, minors who are residents of Australia do not have to lodge a tax return if they earn less than $2,667 in 2008-09. This is because the low income tax offset of $1,200 offsets the tax payable on income less than $2,667.

Last Modified: Tuesday, 30 June 2009

So the question remains is whether Trust Income is treated as one of the 'certain types' of income and therefore taxed at higher rates. Our accountant maintained that it was.

And this link:
http://www.ato.gov.au/individuals/content.asp?doc=/content/20046.htm&page=4&H4

If the minor only has other income (such as a family trust distribution)
their other income (after taking away deductions relating to that income) will be taxed at higher rates.

And:
Example:

Charles is 16 years old and is not an excepted person. His income consists of a $500 family trust distribution and $4,000 wages from casual work. He has $180 in deductions relating to the wages.

Charles will be taxed at ordinary rates on his net casual earnings ($4,000 - $180 = $3,820) and at higher rates on his family trust distribution ($500).

However, the $1200 rebate does apply, eg
If the minor’s taxable income is less than $60,000, they will get the low income tax offset. The maximum tax offset of $1,200 applies if their taxable income is $30,000 or less. This amount is reduced by four cents for each dollar over $30,000.

Example

Kris is 15 years old. She has no excepted income and $900 in trust income. The tax payable on her income is:

Excess over $416 = $900 – 416 = $484

66% of the excess = $484 x 66% = $319.44

As Kris’s taxable income is less than $30,000, she gets the maximum tax offset of $1,200. The net amount payable by Kris is $0 ($319.44 - $1,200).

 

[Ebbie]

So the question remains is whether Trust Income is treated as one of the 'certain types' of income and therefore taxed at higher rates.

When distributing to minors in the past I've always believed the low income rebate meant the full $2,667 was received tax free to the beneficiary. My accountant hasn't had a problem with it either so I hope you don't find otherwise!

Can any of the accountants confirm?

 

[dallee]

The example of Charles shows that if minors earn wage income then the offset will be applied to that income before it is applied to the discretionary trust distribution. However, if they only receive $2667 from the discretionary trust, they should be right. And pocket money doesn't count - I checked!

 

[Gogo72]

The example of Charles shows that if minors earn wage income then the offset will be applied to that income before it is applied to the discretionary trust distribution. However, if they only receive $2667 from the discretionary trust, they should be right. And pocket money doesn't count - I checked!

Yes it is right, but my original question still stands.

The ATO has told me that the trustee should pay the tax on the $2,667 and the beneficiary minor needs to lodge a tax return on the $2667 and include the tax credit paid by the trustee.

The overall effect is NIL tax, but it is a administrative nightmare.

 

[Terryw]

Here is the relevant section.
http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s98.html

INCOME TAX ASSESSMENT ACT 1936 - SECT 98
Liability of trustee

(1) Where a beneficiary of a trust estate who is under a legal disability is presently entitled to a share of the income of the trust estate, the trustee of the trust estate shall be assessed and liable to pay tax in respect of:

(a) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and

(b) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia;

as if it were the income of an individual and were not subject to any deduction.

 

[bort]

a quick related question

If a child is born during the year, can the trust still distribute 2,667 effectively tax free, or does it need to be apportioned based on the date of birth?

Returning to the original topic -

Based on the last post I take it that the conclusion is the trust has to pay the tax, and the minor then claims the tax back via tax return.

 

[coastymike]

A trust ordinarily distributes the profit for the year as at the 30th June. If the child was born prior to the 30th June and is alive on the day the resolution was passed then it will receive the distribution in accordance with the resolution. No need to apportion for number of days during the year.

 

[bort]

I was more thinking of it from the point of view of the child's tax and whether the rebate is reduced as it was not alive for the whole year, rather than the legitimacy of the distribution.

 

[pickle pickle]

Let's say this. Nearly every accountant distributes $2667 (or near that) to a minor, from trusts.

I don't know of any accountant that does a special tax return for the trust because of the distribution to a minor.

I wouldn't be too worried about this question. I think your advice from the ATO is wrong (though not 100% sure of this). About 10% of Australians will be caught by the adminsitration issues if your advice is right and the ATO starts policing this issue.

The ATO is already having a huge fall out from a potential interpertation change in distribution to companies. It's doubttful they will put too much rescources in policing distributions to minors that don't follow some interperation that some ATO guy has said (which I have never heard of before, so I think is wrong), as at the end of the day, it is chicken feed.

 

[dan c]

The trust distribution to a minor is 'eligible income', which is taxed at the higher rate. But, as shown earlier, the low income offset, offsets any tax payable by the individual on the trust distribution received.

For the 2010 year, a minor will be able to receive $3,333 in trust income with no tax payable, due to the increase in the low income offset.

 

[dan c]

However, the trustee is liable to pay the tax above $416 under section 98(1). Is that correct?

Given that the beneficiary, is not liable to lodge a tax return, you can't recoup the tax liability from the trustee.

Something seems wrong with this approach?

Regards
Stressed

I don't think this is correct. From 1/7/2010, trustees need to have TFN's of all beneficiaries, or they need to withhold tax from any distributions. However, we have been advised that minors and those with legal disabilities are exempted from this, and no tax needs to be withheld.

 

[bort]

Just had a look at the 'Partnerships and Trust tax return instructions 2009' from the ATO website, and it looks fairly clear that you don't hold back any tax if they earn less than the $2,666 for 2008/09.

(refer pages 116 - 120)

 

[MattR]

Agree with Dan C, no tfn requirement for distributions to minors as a trustee has an obligation anyway to pay tax on behalf of beneficiaries with a disability (therefore minor i.e. under 18). As the low rate threshold applies I don't foresee a problem.