Trusts

Trust taxation is difficult because three different concepts must be kept separate: the trust deed and trust law, “income of the trust estate” for present-entitlement purposes, and “net income” calculated under s 95 of the ITAA 1936. Most errors begin by treating those concepts as identical.

1. Trust structure and terminology

A trust separates legal ownership from beneficial interests. The trustee holds property subject to equitable obligations. Beneficiaries may have fixed interests, discretionary objects or other rights depending on the trust instrument. Tax consequences therefore begin with the deed and the legal rights it creates, not with a generic assumption that all trusts work the same way.

2. Division 6 and s 95 net income

Section 95 defines the “net income of the trust estate” as a tax-law amount broadly calculated as if the trustee were a resident taxpayer, subject to statutory modifications. That tax-law net income must then be connected to beneficiaries or trustee-assessment provisions under Division 6.

3. Present entitlement and s 97

Section 97 commonly assesses a resident beneficiary on the beneficiary’s share of the trust’s net income where the beneficiary is presently entitled to a share of the income of the trust estate and is not under a legal disability. Present entitlement is a trust-law concept. The High Court’s decisions in Bamford and Carter are central to understanding the relationship between trust income, proportional shares and the timing of entitlement.

4. Trustee assessments

Where beneficiary assessment does not apply, the trustee may be assessed under provisions such as ss 98, 99 or 99A depending on the circumstances. A good answer identifies the beneficiary’s status, residency, legal disability and entitlement before selecting the trustee-assessment provision.

5. Capital gains and franked distributions

Special streaming regimes in Subdivisions 115-C and 207-B can attribute capital gains and franked distributions to beneficiaries where the statutory requirements, including specific entitlement where relevant, are satisfied. Trust resolutions and deed powers therefore matter. It is not enough to allocate “income” generically and assume every tax character follows.

6. Section 100A

Section 100A is an integrity rule directed to certain reimbursement agreements where a beneficiary is made presently entitled but another person receives the economic benefit under an arrangement meeting the statutory conditions. TR 2022/4 explains the Commissioner’s current published view. The statutory exclusions and the concept of ordinary family or commercial dealing require careful factual analysis.

7. Trust losses and family trust rules

Trust losses are not simply distributed to beneficiaries. Schedule 2F to the ITAA 1936 contains complex integrity tests restricting use of prior-year trust losses. Family trust elections and interposed entity elections can alter the operation of those rules but also bring family trust distribution tax consequences. This area should be approached as a separate integrity framework rather than an ordinary deduction calculation.

8. The trust method

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