Special tax rules for trusts

Trust funds are not just for rich kids and they attract a lot of complicated attention from the Australian Taxation Office (ATO). It can be a useful vehicle for the allocation of income but first you’ll need to understand a bit more about what a trust is from the view point of the tax office.

Trust funds, managed funds and the like

For starters, special tax rules apply if you are a beneficiary who is entitled to a share of a trust’s net capital gain. Trusts include managed funds such as property trusts, share trusts, imputation trusts, growth trusts and balanced trusts.

Distributions from trusts can include different amounts. The following two types are relevant for capital gains tax (CGT) purposes:

• capital gains, and
• non-assessable payments.

Non-assessable payments mostly affect the cost base of units in a unit trust (including managed funds) but can in some cases create a capital gain. The trustee should advise you as to whether the CGT discount, the small business 50 percent active asset reduction, or both, have been taken into account in working out the amount of the trust net capital gain.

Financial terms

What can get a bit confusing is that trustees, including fund managers, can use different words to describe the same things. For example, you may have heard the phrase “non-discount gains” – it’s another way of saying “capital gains”, (a capital gain that has been calculated in a certain way).

Non-assessable income

The good news about trusts is that you may be paid some non-assessable income. If your share of the distributed trust funds includes a tax-free sum, CGT concession amount, tax-exempted amount or tax deferred amount, your tax return will be a bit more complicated to complete. An ATO publication titles “Non-assessable capital payments from a trust” can help.
 
The short story here is that while a non-assessable payment from a trust may not need to be included as trust income, it may be relevant in determining the amount of any net capital gain you must declare or it may affect the cost base and reduced cost base of your units or trust interest.

Claiming a tax exception

As with any request for a rebate, declaring your trust income and exceptions requires a strict adherence to the tax rules. There are quite a few conditions, just as there are for declaring capital gains. To make sure your declaration is accurate you will have to do your homework and work closely with the nominated trustees of your fund.

If you’d like to know more the ATO (or your accountant) can assist. Their number is 13 28 61 or you can visit the website. The following booklets, available from the ATO, should also help:

• Deductions from trust income
• Income from a trust - special situations
• Non-assessable capital payments from a trust
• Share of credits from a trust
• Trust losses
• Family trust distribution tax
• CGT on shares and units
• Trusts – ultimate beneficiary non-disclosure tax