Trust with a minor as the beneficiary
- Thread starter Brizza
- Start date
There is a difference between having a minor as one of a class of beneficiaries, or the named beneficiary, and actually distributing to the minor.
If it's not a testamentary trust, then actual distributions to the minor becomes taxable income to the minor, taxable at minor (very high) rates.
Yes, minors get the CGT discount.
If it's not a testamentary trust, then actual distributions to the minor becomes taxable income to the minor, taxable at minor (very high) rates.
Yes, minors get the CGT discount.
All beneficiaries will pay tax on their income. but they will have the benefit of their own tax free threshold - which would be generally $416 for a minor. However income from a testamentary trust would be taxed as adult income and they could get roughtly $20k tax free income.
50% discount should be available too if a resident.
50% discount should be available too if a resident.
Thanks for the replies.
When does the trustee pay tax on behalf of the minor beneficiary? I got this idea from reading here:
https://www.ato.gov.au/Forms/Trust-tax-return-instructions-2013/?page=100
When does the trustee pay tax on behalf of the minor beneficiary? I got this idea from reading here:
https://www.ato.gov.au/Forms/Trust-tax-return-instructions-2013/?page=100
1. A beneficiary must be presently entitled. A potential beneficiary poses no tax concern until they are given a entitlement to trust income;
2. If the trustee doesnt correctly distribute income to ANY beneficiary (esp a minor or non-resident) the Trustee will be assessed.
3. Minors are taxed at 0% up to $416 then its 66% for the first $1500 or so then $47% thereafter...Ouch. This is because teh minor has derived unearned income. Its punitive to limit fraud. If a child is a decd estate beneficiary entitled under a will its "excepted" and bypasses his rule (sometimes).
4. Cetrelink, FTB and other benefits can be severely affected by a trust distribution. Centrelink will send a phonebook to be filled out. Beware !!
A decd estate is different from a discretionary, fixed or unit trust. A testamentary trust also different again.
Generally speaking the Trustee pays tax on behalf of the beneficiary if they are non-resident or a child or the distribution was defective. The child will report the same income AND claim credit for the trustee tax. It is VERY important to lodge the trust tax return days before the individual or the ATO will deny the tax credits.
This is a technical area where advice is needed.
2. If the trustee doesnt correctly distribute income to ANY beneficiary (esp a minor or non-resident) the Trustee will be assessed.
3. Minors are taxed at 0% up to $416 then its 66% for the first $1500 or so then $47% thereafter...Ouch. This is because teh minor has derived unearned income. Its punitive to limit fraud. If a child is a decd estate beneficiary entitled under a will its "excepted" and bypasses his rule (sometimes).
4. Cetrelink, FTB and other benefits can be severely affected by a trust distribution. Centrelink will send a phonebook to be filled out. Beware !!
A decd estate is different from a discretionary, fixed or unit trust. A testamentary trust also different again.
Generally speaking the Trustee pays tax on behalf of the beneficiary if they are non-resident or a child or the distribution was defective. The child will report the same income AND claim credit for the trustee tax. It is VERY important to lodge the trust tax return days before the individual or the ATO will deny the tax credits.
This is a technical area where advice is needed.
Thanks again. I understand it all except I just don't understand where it says:
"If a beneficiary is presently entitled to a share of the trust income and 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."
https://www.ato.gov.au/Forms/Trust-tax-return-instructions-2013/?page=100
It seems to contradict all the other information.
"If a beneficiary is presently entitled to a share of the trust income and 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."
https://www.ato.gov.au/Forms/Trust-tax-return-instructions-2013/?page=100
It seems to contradict all the other information.
No. Its confirms what was said. Normally the beneficiary to a trust is entitled to income and they pay tax on their "share of the trust income". The trustee doesnt pay tax. However, when a beneficiary is a minor or a non-resident the Trustee is taxed instead. There are a variety of ways this operates and the nature of the trust and the beenficiary is relevant. The Trustee is issued an assessment for that share of the trust income at the prevailing rate. Sometimes the minor is also assessed and other times not. If the minor is also assessed credit is given for trustee tax paid.
Then there is beneficiary withholding tax. Failing to follow correct rules can impose withholding tax on the Trustee which can only be recovered and corrected by the beneficiary lodging a return to claim the credit.
There are similar rules for tax non resident beneficiaries where the trustee is assessed and pays the tax and the non resident beneficiaries deal with it at the individual level. Prevents loss of income from the system.
Nothing in particular, just educating myself on how trusts work in relation to investment structures.
Part of education is learning what NOT to do. In practice, it would make no sense to distribute to minor beneficiaries.
Who does the 'their' refer to here?
I would think it is the beneficiary that wears the tax if distributed but the trustee if it isn't.
Except if the beneficiary is a child, a adult with a legal disability, a non-resident taxpayer, a deceased estate or the trustee fails to adequately make a valid distribution. Then there is Trustee non-beneficiary disclosure tax ..The trustee is assessed instead.
Trust taxation isnt for even some tax practitioners. Its a minefield.
So the trustee is assessed at the trustee's normal taxation rates. For what reason and based on what event then, would the child beneficiary submit a tax return after the trustee has submitted a tax return?
They may, or may not, have to.
Child with ANY other income. Yes. If its earned income (ie working at maccas) its important the excepted income is correctly shown to avoid harsh tax outcomes.
Child non-resident. Maybe not...Depends what the trust income was. (Interest & Divs are assessed on a withholding basis NOT income tax basis). A refund of Trustee tax may be entitled in such cases.
Child with a Testamentary entitlement. Maybe. Maybe not.
The problem is demonstrated here. s98(4) doesnt consider trustee tax final (if 98(4) applies) so a return may be required if a refund is due. If its a nil event then a return isnt needed. If extra tax is due a return is needed. A non-resident has no tax free so even an extra $1 income imposes a requirement to lodge.
The normal approach I follow is where I act for a trust I seek to also lodge the beneficiary tax returns or at least consider beneficiary taxation. Thats the personal advice bit. Every trust can be different. Of course I also advise on distributions before 30 June occurs so the Trustee can make the correct allocation..
Child with ANY other income. Yes. If its earned income (ie working at maccas) its important the excepted income is correctly shown to avoid harsh tax outcomes.
Child non-resident. Maybe not...Depends what the trust income was. (Interest & Divs are assessed on a withholding basis NOT income tax basis). A refund of Trustee tax may be entitled in such cases.
Child with a Testamentary entitlement. Maybe. Maybe not.
The problem is demonstrated here. s98(4) doesnt consider trustee tax final (if 98(4) applies) so a return may be required if a refund is due. If its a nil event then a return isnt needed. If extra tax is due a return is needed. A non-resident has no tax free so even an extra $1 income imposes a requirement to lodge.
The normal approach I follow is where I act for a trust I seek to also lodge the beneficiary tax returns or at least consider beneficiary taxation. Thats the personal advice bit. Every trust can be different. Of course I also advise on distributions before 30 June occurs so the Trustee can make the correct allocation..
Distributions from trusts to non residents a different kettle of fish.
First does australia have a double tax agreement with the country in which the beneficiary is resident. If so trustee may have to pay the following withholding taxes
interest distribution - 10%*
dividend distribution - 15% (excluding franked dividends)*
royalty distribution - 10%*
business/rental income - taxed at non-resident rates to the trustee on account of the non-resident beneficiary under section 98(3) or 98(4) of the Act
Current non resident tax rates are 32%
Interest and dividends are a final withholding tax. Distributions of those types wont require the non resident to lodge a tax return if that is the only income.
First does australia have a double tax agreement with the country in which the beneficiary is resident. If so trustee may have to pay the following withholding taxes
interest distribution - 10%*
dividend distribution - 15% (excluding franked dividends)*
royalty distribution - 10%*
business/rental income - taxed at non-resident rates to the trustee on account of the non-resident beneficiary under section 98(3) or 98(4) of the Act
Current non resident tax rates are 32%
Interest and dividends are a final withholding tax. Distributions of those types wont require the non resident to lodge a tax return if that is the only income.
Mike - s98 tax is a trustee tax. Even wht can be imposed on the trustee. Sometime s yes no further return BUT that is actually not normal. A return must be lodged by the beneficiary to access a shre of the refund due if there is no net income. DTA etc has no relevance to that tax. Only to the beneficiary. It most evident with a unit trust. Even if its a WHT basis the taxpayer still must lodge to get the (share of) refund of trustee tax paid. Its ludicrous. The trustee has to pay and the beneficiary gets the refund. In a unit trust it means that the sole beneficiary gets 100% credit for the tax paid by the trustee on what may actually be a tax loss if the trust hold a neg geared IP !!! In theory its zero sum BUT they have to play the game.
Its one of the issues that arise when the "income of the trust estate" isnt same for the beneficiary. Differences incl WHT as well as if taxpayer claims any deductions personally (eg loan interest. s98 is more a creditable withholding tax on top of withholding tax...
And if you lodge the returns at same time the ATO dont give credit on the beneficiary return. Its nucking futz....
Its one of the reasons I just made submission that the proposed CGT withholding on property (non-res owned) will also be a farce. They seem to treat all non-res like they are theives and its resulting is excessive red tape and compliance burdens.
Its one of the issues that arise when the "income of the trust estate" isnt same for the beneficiary. Differences incl WHT as well as if taxpayer claims any deductions personally (eg loan interest. s98 is more a creditable withholding tax on top of withholding tax...
And if you lodge the returns at same time the ATO dont give credit on the beneficiary return. Its nucking futz....
Its one of the reasons I just made submission that the proposed CGT withholding on property (non-res owned) will also be a farce. They seem to treat all non-res like they are theives and its resulting is excessive red tape and compliance burdens.
Does a trust have a limit on the number of beneficiaries it can have and do the beneficiaries have to be named when the trust is drawn up?
Also, if 100% of the profit is distributed to the beneficiaries, does the trustee still lodge a tax return reflecting profit incurred through the trust. Also, does the trust lodge a tax return in its own right or is the 'trusts' tax return, the tax return of the trustee?
Also, if 100% of the profit is distributed to the beneficiaries, does the trustee still lodge a tax return reflecting profit incurred through the trust. Also, does the trust lodge a tax return in its own right or is the 'trusts' tax return, the tax return of the trustee?
At any point in time the beneficiaries of a trust must be known with certainty. There is no limit but it must be possible to say whether X is or isn?t a beneficiary.
A trust is not a separate entity but it is treated as such for tax reasons ? like a partnership. A trust must lodge its own tax return
