However, separation of ownership isn’t the only reason why this tax vehicle is popular. For many, trusts provide a way to minimise tax.
Do trusts have to file tax returns?
To answer simply: Yes, trusts are required to turn in their income tax return annually, and trustees are responsible for meeting all of the trust’s tax obligations.
Trustees must manage the trust’s tax affairs – from registration in the tax system, lodging trust tax returns and paying some tax liabilities.
Despite this, some people establish trusts because of the structure’s perceived tax advantages, such as tax splitting.
Do beneficiaries of a trust pay taxes?
Beneficiaries are required to report their share of the trust’s net income as part of their assessable income.
This means that all income they receive from the trust are taxed at their marginal tax rate.
Any capital gain or capital loss that the trust incurs when assets are disposed are allocated to beneficiaries according to the proportion of their entitlement. The gain or loss must be reported in the individual tax return of beneficiaries, but ATO trust rules also allow the trustee to pay capital gains tax (CGT) on behalf of the beneficiary.
However, if none of the beneficiaries are entitled to the capital gain – according to the trust deed – then the trust is automatically payable for CGT.
There’s usually a CGT discount if individuals and trusts satisfy certain conditions, but current trust rules disallows the discount entitlement if the trustee is taxed at the highest marginal tax rate.
Who can be a beneficiary of a trust?
Beneficiaries of a trust are entitled to any income or capital that the trust owns, but they may only receive income or capital if it is indicated in the trust deed.
A trustee may also be a beneficiary of the trust except when they are also the sole trustee. If the trustee is to be a beneficiary, the trust must have at least two trustees.
Non-residents for tax purposes may also be a beneficiary provided that the trustee withholds the taxes they are liable to pay via PAYG and lodge a report on it.
How will the ATO know if a beneficiary doesn’t pay tax on trust income?
As part of the reporting requirement, trust rules require trustees to include a trustee beneficiary (TB) statement with the trust’s tax return.
The TB statement must include details of beneficiaries and their entitlements.
The ATO will then use the TB statement to check the beneficiary’s own tax return and determine if they correctly declare their entitlements and pay tax on it.
Explore nestegg to learn more about trusts and taxes.
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