A trust is a legal obligation binding a person to deal with property which he controls for the benefit of other persons. In other words, where a person (known as a trustee) has the right to control property for the benefit of others (known as beneficiaries) we say that a trust exists.

Division 6 of the 1936 Assessment Act governs the assessment of trust income.

Before attempting to come to terms with the trust provisions it will be necessary to gain an appreciation of 2 concepts. These are....

A beneficiary is said to be under a legal disability when he is unable to give a trustee a legal discharge. The most common legal disability is that of minority-a child under the age of 18 years can not give a valid discharge to a trustee for any entitlement arising under a trust...

So such amounts must be retained in the trust or be dealt with by the trustee for the benefit of the minor

Which leads us into the second concept -

Where an ENTITLEMENT arises which is

then we say that the beneficiary is presently entitled to that amount.

Refer para 6-100 of the CCH Master Tax Guide for a fuller discussion of this concept

Under sec 97(1) the assessable income of a resident beneficiary shall include the beneficiary's share of the net income of the trust from all sources.

There is one important quality that a beneficiary must have before sec 97 can apply - can you see what it is?

A 20 year old resident beneficiary of a trust is presently entitled to $100 how much will sec 97 include in his assessable income?

Assuming he is not under any other legal disability sec 97 would include the full amount in his income

A 12 year old beneficiary is presently entitled to $100 of trust income.

What amount will be included in his income by sec 98?

Section 98 includes the trust income in the income of the trustee

A 17 year old beneficiary is presently entitled to $100 under a trust but has

other income from paid employment.

What will be included in his income by sec 100

Section 100 includes the entitlement in the beneficiary's income but then allows a credit for the tax paid by the trustee under sec 98

Let's revise the trust provisions

If a beneficiary is presently entitled to a share of the income of a trust then this share can be assessed under sections 97, 98 or 100

Sec 97 will assess the income if he is not under a legal disability (under 18)

Sec 98 will assess the trustee on the income to which the beneficiary is presently entitled if he is under a legal disability.

If the beneficiary is under a legal disability, but earns income from other sources, then the trust income will be included in his assessable income, but the tax paid by the trustee will be allowed as a credit against his total tax liability on income from all sources.

Let's go over all that again

Section 99A might assess the trustee of a trading trust on income derived but not distributed to the beneficiaries.

However ...

Where the Commissioner is of the opinion that it would be unreasonable for sec 99A to apply he can assess trust income to which no beneficiary is presently entitled under sec 99 at rates lower than those which apply under sec 99A.

An example would be the income produced by the assets of the estate of a deceased person before the estate has been administered - such income would be assessed under sec 99 (refer paras 6-180 etc of the CCH Master Tax Guide)

These provisions and the anti tax avoidance provisions contained in the trust provisions are beyond the scope of this course material at this time and will not be dealt with further here. However you should be aware that Division 6 contains a great deal more than has been covered so far.

There is one further provision, which you should know about - Division 6AA. It deals with the income derived by minors (persons under the age of 18