Division 6AA Trusts Superannuation

Trusts

• Trusts can be created in a number of ways:

Express - Implied - Constructive

• Focus on Express Trust

Inter Vivos Trust - Trust created other than by Will

Deceased Estate - Trust created by Will

Types of Express Trust

• Bare trust

• Fixed trust

• Discretionary trust (e.g. Family trust)

• Unit trust – Public / Private.

• Superannuation fund

This course deals only with Australian Resident Trust Estates. Section

95(2) ITAA 1936

2. Calculate Net Income

For our purposes Net Income = Taxable Income

3. Liability

The liability to pay tax on the Net Income of the Trust can attach to the

• Beneficiary(ies)

• Trustee, or

• Beneficiary(ies) and Trustee

This depends on the Beneficiary’s:

▪ Residency

▪ Legal Disability

▪ Present Entitlement

Residency / Legal Disability

Residency

Resident or Non-resident of Australia: section 6(1)

Legal Disability

Beneficiary cannot give an effective discharge because he or she is one of the following:

1. Minor (under 18)

2. Undischarged Bankrupt

3. Insane person

4. Prisoner

Present entitlement to trust income

•

•

Present Entitlement is a critical concept in the trust provisions. This is because the method of taxing trust income varies according to whether it is:

➢ income to which a beneficiary is presently entitled or

➢ income to which no beneficiary is

presently entitled.

Summary

3 Ways to be “Presently Entitled”

1.Right To Demand Payment

If a beneficiary has the Right To Demand Payment or would have, but for a Legal Disability, then he is presently entitled - Whiting and Taylor cases

2.Income paid or applied to benefit a beneficiary

For example a Trustee applies money for the benefit of a beneficiary - Deemed presently entitled - Section 101 ITAA 1936

3.Vested and indefeasible interest _– but no right to demand payment Deemed presently entitled - Section 95A(2) ITAA 1936

Example

•XYZ Inter Vivos Trust - Net Income = $10,000

•Must account for the $10,000

• Beneficiary A has right to demand payment of $5,000 and the beneficiary has No Legal Disability (Section 97)

• Beneficiary B has a vested and indefeasible interest in

$3,000 and the beneficiary has No Legal Disability (Section 98)

• Beneficiary C has $1,000 spent on him by the Trustee and the beneficiary has a Legal Disability (Section 98)

• Accumulated Balance - nobody Presently Entitled to remaining $1,000 (Section 99A)

Section 97 or 98 ITAA 1936

Once a beneficiary is presently entitled then either

Section 97 or 98 ITAA applies

Section 97

Section 97 applies when a Resident Beneficiary is:

• Presently Entitled (under either Whiting/Taylor or Section 101 ITAA 1936) to some or all of the net income of the Trust and

• is Not under a Legal Disability.

Impact of Section 97

The Beneficiary is assessable on the amount of the net income of the Trust to which he/she is presently entitled.

Section 98

Section 98 applies in each of the following cases:

1.When a beneficiary is Presently Entitled to some or all of the net income of the Trust and is under a Legal Disability

2.When a beneficiary is Presently Entitled under subsection 95A(2) – vested and indefeasible interest

3.When a beneficiary is a Non-resident

(sub-sections 98(3) & (4) and section 98A)

Impact of Section 98

• Trustee is liable for tax in the first instance on behalf of the beneficiary at that beneficiary's tax rate.

(Ordinary rates or Division 6AA rates)

• Beneficiary will only be liable in their own right if the Beneficiary derived any income from a source outside the Trust.

Section 98 - Scenario 1

• Beneficiary is Presently Entitled and is under a legal disability and has derivedno other income.

• Impact:

Trustee is liable for tax on behalf of the beneficiary and the beneficiary is not liable.

Section 98 - Scenario 2

•

Beneficiary is Presently Entitled and is under a legal disability and the beneficiary has derived incomefrom outside the Trust

•

Impact:

(a) Trustee is liable for tax on behalf of the beneficiary.

(b) The beneficiary is liable for tax and is assessable on the trust income to which he is presently entitled.

(c) To avoid double taxation the beneficiary is entitled to a credit for the actual tax paid by the trustee (section 100 ITAA 1936).

Section 99 or 99A ITAA 1936

• No Beneficiary Presently Entitled (Trust income accumulated)

• If a Trust fund is accumulating income (which is the same as saying there is no beneficiary presently entitled) then the Trustee is liable as Trustee under Section 99 or section 99A.

• Section 99 only applies if section 99A does not apply.

Section 99 or 99A ITAA 1936

• Section 99 generally applies to Deceased Estates or Bankrupt Estates.

• Section 99A tax rates are higher than section 99 tax rates.

Tax Rates for Trustees Assessed under Section 98

• Where a Trustee is assessed on behalf of the beneficiary under section 98 the rates of tax applicable to the Trustee are those that would be applicable to the beneficiary on the relevant income.

• These would be the normal rates of tax for individuals or companies.

• But Division 6AA rates will apply if there is eligible taxable income of a minor beneficiary.

SUPERANNUATION

Very common trust but can be a very complex area.

Following slide provides a very brief generalised summary.

SUPERANNUATION

There are three ways that superannuation funds are given preferential tax breaks:

1. Money contributed into the funds may be given a concessional tax rate. [Compulsory Superannuation (Superannuation Guarantee Scheme) was introduced in 1986 at 3%. These have since been increased to the current level of 9.5%.]

2. Accumulations within the funds may be given concessional tax rates.

3. Money paid out of the super fund to a retiree may be given concessional tax rates and, in some circumstances, attract no tax.