Legislative Framework

Taxation of trust income is governed by Pt III of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) as supplemented by Div 6E and Subdiv 115C of the ITAA (1997) for capital gains and Div 207 for imputation credits. The main provisions are:

The main provisions of the relevant income tax provisions for trusts that are contained in Pt III of the ITAA 1936 are:

• ss 95–102 , which are the main taxing provisions;

• ss 102AA–102AGA , which cover tax treatment of children in certain circumstances;

• ss 102AAA–102AAZG , which cover non-resident trust estates;

• ss 102D–102L , which cover income from certain unit trusts;

• ss 102M–102T , which cover income of certain public trading trusts;

• ss 102UA–102UV , which cover income of certain closely held trusts;

• ss 95AAA–95AAC , relating to the new tax treatment of trust capital gains and franked dividends; and

• ss 102UW–102UY , being a new Div 6E , relating to the new tax treatment of trust capital gains and franked dividends.

Definitions and terms

The term “trust” itself is not defined by the legislation but some of the more important terms are:

• trustee (s 6 , ITAA 1936);

• net income (s 95 , ITAA 1936);

• present entitlement (s 97 , ITAA 1936);

• legal disability (s 98 , ITAA 1936); and

• specifically entitled: ss 115-228 , ITAA 1997.

Beneficiary presently entitled

A beneficiary who is presently entitled and who is not under a legal disability is subject to tax on his or her “share of the net income of the trust estate”. Trust income of the taxpayer is aggregated with the other income of the taxpayer.

The tax definition of income and the concept of income as understood by the law relating to trusts can be quite different.

No beneficiary presently entitled

Where no beneficiary is presently entitled:

• trust income is taxed in the hands of the trustee at the maximum rate of 45% plus budget repair levy of 2%, plus medicare levy of 1.5% (s 99A , ITAA 1936); and

• taxation at concessional rates is possible if the Commissioner of Taxation is prepared to exercise his discretion not to apply the higher rates: s 99 , ITAA 1936.

Deceased estates

Deceased estates are treated as trusts for tax purposes. Beneficiaries are not considered to be presently entitled to any of the assets of the deceased estate until estate liabilities have been discharged and the entitlement of the beneficiaries quantified.

See Income Tax.

Stamp duty is a state based tax and varies in every state and territory. In most jurisdictions, the critical points for the levying of duty relating to trusts are:

• on a declaration of trust over unspecified property, fixed rates of duty normally apply;

• on a declaration of trust over specific property, ad valorem rates normally apply;

• on a transfer of trust assets to a beneficiary, ad valorem rates normally apply but there are exemptions; and

• on a transfer of trust property from the legal personal representative of a deceased estate to a beneficiary, nominal, fixed rates or an exemption normally apply.

New South Wales

The applicable legislation is the Duties Act 1997 (NSW).

Dutiable transactions relating to trusts include:

• a transfer of dutiable property; and

• a declaration of trust over dutiable property.

Victoria

The applicable legislation is the Duties Act 2000 (Vic).

Dutiable transactions relating to trusts include:

• a transfer of dutiable property; and

• a declaration of trust over dutiable property.

Queensland

The applicable legislation is the Duties Act 2001 (Qld).

Dutiable transactions relating to trusts include:

• a transfer of dutiable property; and

• a declaration of trust over dutiable property.

Western Australia

The applicable legislation is the Duties Act 2008 (WA).

Dutiable transactions relating to trusts include:

• a transfer of dutiable property (s 11(1)(a) );

• a declaration of trust over dutiable property (s 11(1)(c) ); and

• a trust acquisition or a trust surrender: s 11(1)(h) .

South Australia

The applicable legislation is the Stamp Duties Act 1923 (SA).

The Stamp Duties Act 1923 (SA) imposes stamp duty on certain instruments effecting a conveyance or transfer of property and on certain transactions which are effected without creating instruments.

Dutiable conveyances relating to trusts may arise from:

• a transfer of property to a person who takes as trustee;

• a declaration of trust;

• the creation of an interest in property subject to a trust;

• a transfer of an interest in property subject to a trust;

• the surrender or renunciation of an interest in property subject to a trust; or

• the redemption, cancellation or extinguishment of an interest in property subject to a trust, whether or not any consideration is given for the transaction.

As part of the 2015–2016 South Australian Budget, a number of stamp duty measures were announced and subsequently legislated including:

• abolition of duty on non-quoted marketable securities (from 18 June 2015);

• abolition of duty on transfers of non-real property (from 18 June 2015);

• abolition of duty on the issue, redemption and transfer of units in unit trusts which do not hold land;

• phased abolition of duty on transfers of non-residential, non-primary production real property (from 1 July 2016 to 1 July 2018);

• full abolition of duty on transfers of units in unit trusts (from 1 July 2018); and

• removal of the $1 million landholder threshold (from 1 July 2018).

The legislative amendments to implement these measures are contained in the Statutes Amendment and Repeal (Budget 2015) Act 2015 (SA).

Tasmania

The applicable legislation is the Duties Act 2001 (Tas).

Dutiable transactions relating to trusts include:

• a transfer of dutiable property; and

• a declaration of trust over dutiable property.

Northern Territory

The applicable legislation is the Stamp Duty Act 1978 (NT).

Dutiable transactions relating to trusts include:

• a transfer of dutiable property; and

• a declaration of trust over dutiable property.

Australian Capital Territory

The applicable legislation is the Duties Act 1999 (ACT).

Dutiable transactions relating to trusts include:

• a transfer of dutiable property; and

• a declaration of trust over dutiable property.

Variations of trust

Ad valorem stamp duty may be payable on any transaction which varies the terms of a trust by:

• varying a beneficial interest; or

• adding or removing a potential beneficiary.

This is often described as a "resettlement" of the trust.

A variation of trust may be dutiable as a transfer of trust property. This will occur if there is a “resettlement” of trust property. Some variations adding or deleting some categories of beneficiaries are not dutiable but may be treated as a resettlement for Federal capital gains tax purposes.

Declarations of trust in an agreement for sale

Care must be taken in contracts for sale of land if a trust is involved in the purchase. It is possible to be assessed for two heads of ad valorem duty. One is for the transfer of dutiable property and the second is for a declaration of trust over dutiable property.

Victoria

A declaration of trust over non dutiable Victorian property or unidentifiable property is assessed for duty at a rate of $200.

A declaration of trust over dutiable Victorian property is assessed at ad valorem rates of duty: s 7(1)(b)(i) , Duties Act 2000 (Vic).

Western Australia

Generally, double duty is not chargeable in Western Australia.

Where a contract for the sale of land involves a trust, certain conditions need to be met and sufficient evidence needs to be produced to the Commissioner to ensure that the transaction is not subject to double duty: s 42(4) , Duties Act 2008 (WA).

Certain specific transactions relating to declarations of trust are not subject to double duty: ss 42(9) , 42(10) , 42 (11) , Duties Act 2008 (WA).

South Australia

Generally, double duty is not chargeable in South Australia. Instruments which relate to the same transaction (such as a declaration of trust or transfer of property to a trustee) as an instrument stamped under s 71(3)(a) will be stamped without further duty being imposed: ss 71(13) , 71(14) of the Stamp Duties Act 1923 (SA).

Tasmania

A declaration of trust over non dutiable Tasmanian property or unidentifiable property is assessed for duty at a rate of $50.

A declaration of trust over dutiable Tasmanian property is assessed at ad valorem rates of duty: s 6(1)(b)(ii) , Duties Act 2001 (Tas).

Property vested in an apparent purchaser

In some jurisdictions, if a person has paid the whole of the purchase price and a property is vested in another entity, the person paying for the property is entitled to have it transferred to him for nominal duty utilising the concessional provisions of the relevant Act.

Victoria

Duty is imposed on any transaction that results in a change of beneficial ownership of dutiable property (other than an excluded transaction): s 7(1)(b)(vi) , Duties Act 2000 (Vic).

Exemptions and concessional rates of duty in relation to trusts are found in ss 33–38 . Section 42 provides that no duty is chargeable on transfers by a legal personal representative to a beneficiary under a will.

Western Australia

In Western Australia, duty is imposed on dutiable transactions: s 10 , Duties Act 2008 (WA).

There are certain dutiable transactions for which only nominal duty is payable. Such transactions include where a declaration of trust is made by an apparent purchaser in relation to identified dutiable property vested in the apparent purchaser on trust for the real purchaser, where the real purchaser will provide the purchase money for the dutiable property: s 117 , Duties Act 2008 (WA).

Other trust transactions for which nominal duty is chargeable are referred to in ss 114 to 116 and 118 to 120 of the Duties Act 2008 (WA).

Section 62 of the Duties Act 2008 (WA) provides that no duty is chargeable on a trust acquisition or a trust surrender in relation to a discretionary trust that is the result of the birth, death, marriage, divorce or ending of a de facto relationship of a person.

Transfers of units in a unit trust are generally not dutiable unless the criteria set out in the Landholder Duty Chapter (Ch 3) are met. That is, the unit trust scheme owns land in Western Australia of which the total value is $2,000,000 or more: ss 29 , 155 , Ch 3 of the Duties Act 2008 (WA).

Australian Capital Territory

In the ACT, if a person has paid the whole of the purchase price and a property is vested in another entity, the person paying for the property is entitled to have it transferred to him for nominal duty of $20 under s 56 of the Duties Act 1999 (ACT).

Transfer from a trustee to a beneficiary

A transfer from a trustee to a beneficiary is dutiable unless a concession applies.

Victoria

In relation to a transfer to a new trustee, there is an exemption from duty if the commissioner is satisfied that the transfer is:

• because of the retirement of a trustee and the appointment of a new trustee; and

• for the purpose of vesting the property in the new trustees: s 33 of the Duties Act 2000 (Vic).

Western Australia

In Western Australia, duty is imposed on dutiable transactions: s 10 of the Duties Act 2008 (WA).

Nominal duty is payable in relation to a transfer of dutiable property to and from a trustee, other than a trustee of a unit trust scheme or a discretionary trust, where the trustee will hold the property on trust for the transferor and no other person will obtain a beneficial interest in the property or where there is a retransfer to the transferor and no other person has had any beneficial interest in the property: s 118 of the Duties Act 2008 (WA).

Nominal duty is payable in relation to a transfer to a trustee as a consequence of the retirement of a trustee or the appointment of a new trustee, provided certain conditions are satisfied: s 119(3)(a) of the Duties Act 2008 (WA).

South Australia

There are exemptions in the Stamp Duties Act 1923 (SA) for certain transfers to beneficiaries of a trust. Some of these exemptions apply specifically to family discretionary trusts: ss 71(5)(e) , 71(5)(f) , 71(5)(g) , 71A of the Stamp Duties Act 1923 (SA).

Tasmania

In relation to a transfer to a new trustee, there is an exemption from duty, if the commissioner is satisfied that the transfer is:

• because of the retirement of a trustee and the appointment of a new trustee; and

• for the purpose of vesting the property in the new trustees: s 37 , Duties Act 2001 (Tas).

Northern Territory

A transfer from a trustee to a beneficiary is prima face not dutiable if the requirements in the exemption provisions are met.

Australian Capital Territory

A transfer from a trustee to a beneficiary is dutiable unless a concession applies. Under s 58 of the Duties Act 1999 (ACT), duty of $20 is chargeable on transfers of dutiable property from trustee to beneficiary if the requirements of the concession are met.

In relation to a transfer to a new trustee as result of a retirement of a trustee or the appointment of a new trustee, duty of $20 is chargeable if the commissioner is satisfied that the new trustee and any continuing trustees are unable to take any benefits under the trust: s 54, Duties Act 1999 (ACT).

See Stamp duty.

Concepts

There are defined terms and terms of art that must be understood in order to understand the taxation of capital gains.

CGT events affecting trusts

The ITAA 1997 sets out nine CGT Events that specifically relate to trusts. These are:

• creating a trust over a CGT asset – CGT Event E1;

• transferring a CGT asset to a trust – CGT Event E2;

• converting a trust to a unit trust – CGT Event E3;

• capital payment for trust interest – CGT Event E4;

• beneficiary becoming entitled to a trust asset – CGT Event E5;

• disposal to beneficiary to end income right – CGT Event E6;

• disposal to beneficiary to end capital right – CGT Event E7;

• disposal by beneficiary of capital interest – CGT Event E8; and

• creating a trust over future property – CGT Event E9.

Trusts and small business — CGT concessions

Various CGT tax concessions are available to small businesses that satisfy the definition of “small business entity”. The threshold test is a $2 million aggregated turnover test.

Trusts that carry on business are entitled to the CGT concessions subject to satisfying some additional tests relating to ownership and control.

Important points to note:

• death triggers a disposal for CGT purposes;

• the legal personal representative or a beneficiary is taken to acquire the assets at the cost base of the deceased or, if there is no cost base, at market value; and

• there is a deferral of CGT until there is a further disposal.

See Capital gains tax.

Land tax is a state based tax. It is levied throughout all of the states and the Australian Capital Territory. It is not levied in the Northern Territory.

Except for the Australian Capital Territory, land tax is levied on the value of land over a certain threshold. Some trusts are not eligible for the threshold concession in some jurisdictions and in other jurisdictions different thresholds apply to trusts.

New South Wales

The applicable legislation is the NSW Land Tax Management Act 1956 .

• a special trust does not qualify for the threshold concession;

• a trust is not a special trust if it is:

Note: a family unit trust is a defined concept.

Unit trusts

Unit trusts generally are treated as special trusts unless they can meet certain conditions — including that the unitholders must be entitled to a fixed proportion of the income and capital distribution from the trust.

Victoria

The applicable legislation is the Land Tax Act 2005 (Vic).

Key concepts in Victoria are:

• A surcharge rate of 0.375% applies to land acquired by discretionary trusts in addition to land tax to Victorian landholdings between $25,000 and $1.8 million. The surcharge tapers for landholdings between $1.8 million and $3 million and does not apply to land holdings over $3 million;

• the threshold for trusts is $25,000 instead of the general threshold of $250,000;

• all trusts are taxed at the higher rate unless they come under the definition of excluded trusts;

• some relief is available to deceased estates; and

• a trustee of a fixed trust or a unit trust may avoid the surcharge by notifying details of the beneficial owners. The beneficiary will then be assessed as well as the trustee and a credit allowed for the tax paid by the trustee.

Note: From 1 January 2010, if a trustee fails to notify the commissioner of the acquisition, disposal of trust land or any other events under the Act, a penalty tax will be imposed: s 46K of the Land Tax Act 2005 (Vic).

Queensland

The applicable legislation is the Land Tax Act 2010 (Qld).

Key concepts in Queensland are:

• different thresholds apply to different taxpayers. Trustees, including trustees of deceased estates fall into a separate category;

• the general threshold is $600,000 for resident individuals. For trustees it is $350,000 (2016 tax year). Tax above the threshold is $500 + 1 cent for each $1 more than $600,000 up to $1,000,000 and $4,500 plus 1.65 cents for each $1 more than $1,000,000 up to $3,000,000. Additional rates apply for over $3,000,000 instead of what is there; and

• some exemptions apply where land is owned by a trust and is used as a residence for the beneficiaries.

Western Australia

The applicable legislation is the Land Tax Assessment Act 2002 (WA) and the Land Tax Act 2002 (WA).

Key concepts in Western Australia are:

• land held on trust is taxable land;

• a person in whom land is vested as trustee is liable for any land tax assessed on that land as if the land was the trustee’s own. The assessment of land tax is held separate from any assessment of land held by the trust on trust for another person or land held by the trustee in their own right: ss 9 , 11(2) and (3) of the Land Tax Assessment Act 2002 (WA).

• land held on trust will be subject to the same rates as other landholdings: s 5 , Table 8 of the Land Tax Act 2002 (WA);

• a trustee is exempt from land tax where property is held on trust for disabled beneficiaries and at least one beneficiary uses the property as his or her primary residence, and certain conditions are met: s 26 of the Land Tax Assessment Act 2002 (WA);

• private residential property is exempt if it is owned by an executor or an administrator of a will as trustee and the beneficiary is entitled to a life interest and has a right to use and does in fact use, the property as their primary residence: s 22 of the Land Tax Assessment Act 2002 (WA); and

• exemptions apply to land held on trust for religious bodies, an educational institution, a public purpose, a public, charitable or benevolent institution or a sports association: ss 32 , 33 , 36 , 37 and 38 of the Land Tax Assessment Act 2002 (WA).

South Australia

The applicable legislation is the Land Tax Act 1936 (SA).

Key concepts in South Australia are:

• tax free threshold of $353,000;

• certain land is exempt based on how the land is used or who owns the land. There are a number of exemptions that would apply to charitable trusts and other similar trusts, eg “land owned by an association established for charitable, educational, benevolent, religious or philanthropic purposes”; and

• trustees can apply to have any property they own assessed separately from property they own in another capacity.

Tasmania

The applicable legislation is the Land Tax Act 2000 (Tas).

Key concepts in Tasmania are:

• the tax free threshold is $25,000 (as from 1 July 2010);

• charitable institutions, property owned for religious purposes and other specific categories are exempt from land tax (s 18 );

• holders of pensioner concession cards are exempt; and

• there is a main residence exemption (s 6 ) and a primary production land exemption: s 7 . This is because, although there is a power under the Act to do so, no tax has been levied against this category of land.

Trustees

Land holdings of trustees are aggregated. A trustee is treated no differently to any other taxpayer and there are no special provisions that apply to trustees: s 24(1) .

Deceased estates

A main residence exemption will apply to an executor or administrator of a deceased estate where the residence is occupied by a beneficiary.

Australian Capital Territory

The applicable legislation is the Land Tax Act 2004 (ACT): ss 7 and 9 Land Tax Act 2004 (ACT) .

Land tax is imposed on residential land held by a trustee, which is defined in the Act so as to exclude an executor of the will or the administrator of the estate or the manager or guardian of a person with a legal disability.

See Land tax.

In order to qualify for the payment of many of the benefits available under the Social Security Act 1991 (Cth) a person may have to satisfy an income test, an assets test, or both.

A person who is involved with a private trust may have some or all of the capital and income of the trust attributed to them if they satisfy certain tests of involvement with the trust.

The tests for attribution

The following are tests for attribution:

• a control test; and

• a source test.

Relinquishing control

To avoid the consequences of attribution a person may relinquish control of the trust and:

• is then deemed to have made a gift of those assets held by the trustee; and

• will be treated as the owner of those assets for a further 5 years.

Testamentary trusts

The Centrelink attribution rules also apply to trusts created by will.

See Centrelink rules.