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The taxation of trusts is a subject to the person upon whom the trust is entitled and whether there is a legal disability involved. In this case, there is an agreement between three parties. The first party is the settlor who is paying money to the trust, which in this case is Bob and Linda. The second part is the trustee, who is the company receiving the money, which is the bank. The last part here is the beneficiaries who are the children. The first consideration, in this case, is to determine the net loss or income of the trust.

Entitlement is critical when considering trust taxations. The Principles of tax in Australia direct that entitlement applies to a beneficiary if and only if they have a right to receive a share of payment from the trust.

In Harmer v FCT (1991) 173 CLR 264, the High Court stated (at 271) that a beneficiary has a present entitlement if:

  • The beneficiary has an interest in the income which is both vested in interest and vested in possession;

  • The beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment.

In this case, Felicity and David are entitled to the shares. However, the two beneficiaries are registered to be under a legal disability. Hence the beneficiary will pay the tax as per the provisions upon income.

The case of BLF Family additionally has an issue of distribution. The parents initially agreed to give the children half of the net income from the trust. However, the ultimate cause is that Bob pays just a third of the payment, then banks the other portion. A discrepancy may arise from the case posing unprecedented situations. Setting the record straight on this according to the Principles of taxation laws of Australia states that the beneficiaries of a trustee have less to do with the manner of share. Distribution of trusts lies with the settlor. Generally, the case of BLF Family must follow these guidelines.

The income of a trust must be subject to distribution to a beneficiary. The beneficiaries are also entitled to all capital gains and dividends. All trust distributions are subject to tax in the form of Medicare and individual tax rates. The following calculations elaborate the case of BLF Family.

The first step is to calculate the net income of the trust

Net Income + Deductible expenses

$ 37, 000 + 10, 000

$ 47, 000

The trustees are entitled to the benefits hence they pay tax under 99A ITAA 1936 which states: “[W]here a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate … the assessable income of the beneficiary shall include … that share of the net income of the trust estate… (emphasis added).”

A Medicare levy (Div 6AA of ITAA 1936) also applies in this case.

The tax rate is 30% of the total income.

The two must also pay income tax from their part time jobs.

1/3 of the Income = 1/3 X $47, 000 = 15, 670

Trust tax = 0.3 *15, 670 = $ 4, 700

Wages = $ 26, 000 + 6, 000 = $ 32, 000

Tax = 45% of 32000 = 14, 400

Total tax = 14, 400 + 4, 700 = 19, 100

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