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Trust taxation basics

Discretionary trusts are common in Australia, and generally function as family or business trusts. These trusts are typically created to hold a family’s assets or business, helping to protect those assets, while also facilitating tax planning for the trust’s beneficiaries.

Another common type of trust is the managed investment trust similar to the Trilogy Monthly Income Trust, which allows investors to collectively invest in passive income activities, which are typically shares, property or fixed interest assets. Beneficiaries of the managed investment receive distributions which can form an income or may be reinvested back into the trust.

While there are many different types of trusts, the trust structure simply allows a person or company to hold an asset for the benefit of others. A trustee is appointed to control the assets held in trust, and those who benefit from the trust are beneficiaries.

One major appeal of the trust structure is the way it allows those using the trust to potentially minimise or have more control over their taxable earnings. From how it works to the changes to look out for this financial year, we’re talking all things trust taxation.

How are trusts taxed?

According to the Australian Taxation Office, the appointed trustee is responsible for the tax management of the trust including registration of the trust in the taxation system, lodging returns and paying tax liabilities. Adult beneficiaries include their share of the trust’s net income as income in their own tax returns.

When it comes to tax administration, trusts are treated as taxpayer entities. Often used within a discretionary trust, the practise of minimising tax on your earnings through these taxpayer entities is known as income splitting or streaming, allowing high-income individuals to direct their earnings into a trust – business or investment income, not wage or salary earnings – where the trustee can allocate that income, generally making payments to beneficiaries with the lowest incomes, who will pay the least tax.

As income can be allocated at the trustee’s discretion, it can be diverted to adult children or retired parents who pay tax within a lower tax bracket, allowing the trust to make multiple use of the tax-free threshold and lower tax rates enjoyed by people on lower incomes.

Similarly, business owners who run their business through a discretionary trust, where distributions are made by the trustee to three or four adult family beneficiaries, could minimise their tax substantially. This can provide a way for higher income earners to provide ongoing support for example, to retired parents, or to cover fees or rent for university-aged kids.

When it comes to managed investment trusts, those who invest in these funds may also benefit from certain tax incentives. The way in which a managed investment trust works allows returns to be distributed tax effectively through the trust structure. As tax liability is borne by the investor, either directly or via the withholding tax regime for foreign investors, the investment can be made with minimal tax leakage or risk of double taxation for investors.

A managed investment trust that has investments in capital assets may be able to elect to treat certain assets on ‘capital account’, as opposed to ‘revenue account’ holdings. This can allow eligible investors to access the general capital gains tax (CGT) discount, offering a 50% reduction for individuals and 33.33% for superannuation funds. So, on disposal of assets held within the trust for more than 12 months, eligible investors may benefit from a substantially reduced tax liability on capital gains distributed through a managed investment trust. However, it’s important to always read and understand the Product Disclosure Statement for your managed investment trust and consult a financial adviser to ensure you understand the ins and outs of how taxation works for your trust and your situation.

What changes can you expect on trust taxation in 2018-2019?

Trust taxation amendments proposed within the 2018-19 Federal Budget may change trust taxation rates for some investors, as managed investment trusts will be prevented from applying the capital gains discount at the trust level. According to the proposal, from 1 July, 2019, beneficiaries who are not entitled to the CGT discount in their own right (which means, investors on revenue account, companies, and foreign investors), will not have the CGT discount applied at the trust level.

In addition to this change, new jurisdictions have been added to the list of information exchange countries. Residents of these jurisdictions will be eligible to access the reduced managed investment trust withholding tax rate of 15% when receiving trust distributions from the trust from 1 January, 2019, instead of the default 30% withholding tax rate.

For more on tax, we recommend that you seek advice from a tax professional and a financial adviser, to consider all of your circumstances when considering tax treatment of the investment structures mentioned above. Or, if you interested in learning more about investing in managed investments including those operated by Trilogy, read about why more investors are choosing mortgage trusts.

The material on this website is intended only to provide a summary and general overview on matters of interest.  Trilogy does not provide tax advice, and readers should note that the above should not be relied on as it is intended to provide background information only.  Trilogy is only licensed to provide general financial product advice on its own products and does not consider your objectives, financial situation or needs when providing any information or advice. You should consider whether the advice is suitable for you and your personal circumstances and we recommend that you seek personal financial product advice on your objectives, financial situation or needs and obtain and read the relevant product disclosure statement before making any investment decision.