Tax and Structures

Trust Taxation

Tax on trust distributions

The taxation of a trust is similar to that of a partnership.

Each financial year the trust can distribute its net income to the unit holders or the beneficiaries.

This income is subsequently taxed in the hands of the unit holder/beneficiary as if they had earned the income themselves. So, it’s included in their assessable income and taxed at their marginal tax rates.

If the trust doesn’t distribute its income, the trust’s income incurs tax at the top marginal tax rate (45%) plus the Medicare Levy (total of 47%). This rule acts as a disincentive for the trust to retain income. Some special exemptions may apply.

For example, a unit trust has ten investors who each buy 1,000 units for $10 each (total investment is $10,000 for each investor). Accordingly, $100,000 is in the trust with 10,000 units issued to the investors.

The trustee purchases and manages assets, in this example, shares and a commercial property. Each investor has a fixed entitlement to 10% of the trust’s income and owns 10% of the trust’s capital.