In Australia, when dealing with trust tax rates, it’s important to understand that trusts themselves typically do not pay taxes.
The people who get money from the trust, called beneficiaries, pay taxes on the money they receive.
The amount of tax they pay depends on their personal tax rates.
If the trustee doesn’t distribute the trust’s money within the year, they face what’s often referred to as the ‘trustee tax rate,’ which is notably high.
You generally don’t want to retain income if a beneficiary on a lower tax rate can receive the distribution.
This guide explores everything you need to know about trust tax rates.
Table of Contents
Trust Tax Rates – Basics
As explained earlier, it is either the beneficiaries or the trustee who pays tax based on the income that is received or retained.
Generally, it is preferable to ensure the income is paid out to beneficiaries, who are often on lower tax rates. If income is retained instead, it gets subjected to the trustee tax rate, which is the highest rate (45% + 2% medicare).
But what’s taxed? It’s the net income of the trust. This is the trust’s income after all allowable deductions.
You may wonder, ‘If I haven’t received the money yet, do I still need to pay tax?’ The answer is yes if you are “presently entitled” to the income. That brings us to the next section, understanding the importance of entitlement.
Understanding Beneficiary Entitlements
Because this is such an important concept, I will break it down with a simple piggy bank analogy. That means quickly covering some of the trust basics again.
A trust is like a piggy bank where someone (the trustee) holds onto money or property for others (the beneficiaries). The trustee must follow specific rules, which are written in a document called a trust deed.
Present Entitlement
Imagine the piggy bank being full of coins. At the end of each year, the trustee decides how many coins each beneficiary gets. When a beneficiary is told, “This is your share of the coins, and you can claim it now,” they have a ‘present entitlement.’ In other words, they have the right now (in the present) to get their share from the piggy bank.
As mentioned earlier, present entitlement doesn’t mean the beneficiary gets a physical distribution immediately. But because the beneficiary is entitled to that income, they must report it on their tax return and pay income tax on it.
Specific Entitlement
Now, think about the piggy bank filled with coins and some precious jewels. The trustee might say, “This particular jewel is for you, and you can claim it now.” This is a ‘specific entitlement.’ They’re not just entitled to any part of the trust but have a right to that specific jewel.
Suppose our trustee decides to sell one of the jewels from the piggy bank. Let’s say it’s a diamond that was initially bought for $1000, but now, because diamonds have become more valuable, it gets sold for $2000. This creates a capital gain of $1000.
Here’s where things change a bit. The trustee decides to allocate this capital gain to a particular beneficiary. It’s like the trustee saying, “This $1000 gain from the diamond sale is specifically for you.
Similar with present entitlement, even if the beneficiary doesn’t physically receive the $1000, they are responsible for it on their taxes. So, when they do their tax return, they have to report this $1000 as part of their yearly income. This might increase the tax they owe.
Taxation of Minors
In Australia, there are special rules about how much tax people under 18 must pay on income they receive from a trust.
When adults get money from a trust, they pay tax based on their income tax bracket. The more money they make, the more tax they pay.
But it’s different for minors. The government doesn’t want adults to avoid paying their fair share of taxes by putting money into trusts for their children.
So, minors must start paying tax at a much lower amount of income from a trust compared to what they might earn from a job or interest from savings.
In fact, they might have to pay a higher rate of tax on this trust income than an adult would.
There are a few exceptions to these rules, like if the minor is working full-time or the income comes from a trust left by someone who has passed away. But in general, children in Australia are taxed differently when it comes to trust distributions.
Tax Rate Table for Resident Minors
See this tax rate table for the income of a minor who was a resident for the whole income year:
| Eligible income | Tax rate if beneficiary is a resident |
| $0–$416 | Nil |
| $417–$1,307 | Nil + 66 cents for every dollar over $416 |
| $1,308 and above | 45 cents in the dollar of the entire amount |
You want to pay beneficiaries under 18 years at most $416.
Tax Rate Table for Non-Resident Minors
See this tax rate table for the income of a minor who was a non-resident for the whole income year:
| Eligible income | Tax rate if beneficiary is a non-resident |
| $0–$416 | 32.5 cents in each dollar up to $416 |
| $417–$663 | $135.20 + 66 cents for every dollar over $416 |
| $664 and above | 45 cents in the dollar of the entire amount |
Taxation of Non-Residents
When a person who doesn’t live in Australia (a non-resident) gets money from an Australian trust, it is the job of the trustee to pay tax on that money.
The tax rules treat the trustee as if they were the non-resident person getting the money.
This means the trustee pays tax for the non-resident person. They use the same tax rates that apply to non-residents.
Tax Rate Table for Non-Residents
See this 2021-2022 foreign resident tax rate table:
| Taxable income | Tax on this income |
| 0 – $120,000 | 32.5c for each $1 |
| $120,001 – $180,000 | $39,000 plus 37c for each $1 over $120,000 |
| $180,001 and over | $61,200 plus 45c for each $1 over $180,000 |
How do non-residents get back the tax?
Getting tax back as a non-resident beneficiary happens if the trustee has paid more tax on behalf of the beneficiary than they should have.
Usually, to determine whether they are eligible for a refund, the non-resident beneficiary must file an Australian tax return. When they file this return, they will declare the income they received from the Australian trust and the tax the trustee has already paid on their behalf.
Suppose the trustee has paid more tax than the beneficiary owes based on their income and personal circumstances. In that case, the beneficiary will receive a refund for the excess amount. This extra amount is the difference between the tax that was paid and the tax that was actually due.
It’s important to remember that tax laws can be complex, and each individual’s circumstances differ. Therefore, non-resident beneficiaries may want advice from a tax professional to understand their obligations and potential refunds.
Capital Gains Tax and Trusts
Capital gains tax (CGT) applies to trusts in Australia. When a trust makes a capital gain, for example, by selling a property or shares at a profit, the trustee typically distributes it to the beneficiaries, who then include it in their tax returns.
The beneficiaries are then responsible for paying tax on their share of the capital gain and their other income. The amount of CGT payable depends on the individual tax rate of the beneficiary and how long the trust held the asset. If the asset was held for more than 12 months, a 50% discount on the capital gain could apply.
Suppose the trust does not distribute the capital gain to the beneficiaries. In that case, it is included in the trust’s net income and taxed at the top marginal rate.
Trust Losses and Their Impact
When it comes to losses within a trust, the rules are different from those for individual taxpayers. Trusts cannot distribute losses to their beneficiaries. Instead, losses made by a trust in a given financial year must be offset against future income generated by the trust.
However, trusts must pass specific tests to use these losses in future years. These tests are designed to prevent trusts from being bought primarily to gain access to their losses.
The tests, known as the “trust loss measures,” include the income injection test, the pattern of distributions test, and the control test. If a trust fails any of these tests, it may be denied the ability to offset its losses against future income.
If a trust does pass these tests, it can carry forward its losses indefinitely, offsetting them against future income until they’re exhausted. These losses can be used to reduce the trust’s taxable income in the years when the trust makes a profit.
Wrapping Up
The taxation of trusts in Australia is a complex process that primarily revolves around who bears the tax burden – the beneficiaries or the trustee.
This obligation is determined based on the income received or retained, with the trust’s net income forming the taxable amount.
It’s essential to understand the concept of ‘entitlement,’ as beneficiaries may be taxed on their entitled income, even if it has yet to be physically received.
Special rules apply to minors and non-residents. Children are taxed at higher rates to discourage tax avoidance through trust distributions. At the same time, non-residents have their tax paid by the trustee at the non-resident rates.
Trusts are also liable for Capital Gains Tax (CGT) on any profit from selling assets, usually distributed among beneficiaries. Losses, however, cannot be distributed but can be offset against future income.
Navigating these complexities requires understanding trust tax fundamentals. Given the individual nature of tax matters, seeking professional tax advice is recommended.
Ready to learn more?
Check out our guides, for more information covering Family Trust benefits:
- Setting Up a Family Trust in Australia
- How Much Does it Cost to Set Up a Trust
- What Is the Settlor of a Trust
