FAQ 51 How are trust profits taxed

A trust ordinarily does not pay tax. It only pays tax on the funds that it fails to distribute.  It is the beneficiaries/ associated entities that pay tax on the distributed income of the trust.

in the case of a bucket company it will pay tax at the current company rate of 30%

Distribution to another trust would only be performed if the trust receiving the distribution had losses. The distribution would never exceed the total of these losses.

Each beneficiary pays tax AT THEIR MARGINAL RATE.

Example using 2013 tax rates

Beneficiary A has a taxable income of $45,000 – he would be paying tax at the highest rate of  32.5%

He now receives a distribution of $15,000 – his taxable income becomes $60,000 –  he is still paying tax at the highest rate of 32.5%

Beneficiary B has a taxable income of $75,000 – he would be paying tax at the highest rate of  32.5%

He now receives a distribution of $15,000 – his taxable income becomes $90,000 –  he is now paying tax at the highest rate of 37%

Bucket Company C has a taxable income of $255,000 -it  would be paying tax at the company rate of  30%

It now receives a distribution of $30,000 – it’s taxable income becomes $285,000 –  it  is still paying tax at the company  rate of 30%

Beneficiary C has a taxable income of $2,000 – he would be paying no tax as the first $18,20I has no tax levied.

He now receives a distribution of $15,000 – his taxable income becomes $17,000 –  he is still paying  no tax as he is still under the threshold of $18,200.

NOTE That distribution amounts are what is left over after all trust expenses have been paid and allowances claimed. These expenses and allowances are items such as repairs, rates, water rates, interest, bank charges, management fees etc and depreciation. The trust accounting takes care of all of these BEFORE distributing to the beneficiaries. If there is nothing left to distribute then so be it. If there is a loss ( expenses greater than rental income) then this loss is accumulated in the trust accounting until such time that there is sufficient profit to offset the loss.

Example

2013 A trust has an annual rental income of $26,000 and expenses plus depreciation allowances totalling $30,000

There is a loss of $4,000. There is no distribution to the beneficiaries. The loss is carried over in the accounts to next years accounting.

2014 The trust has an annual rental income of $34,000 and expenses plus depreciation allowances totalling $28,000

This year there is a profit  of $6,000, however there is a $4,000 loss carried over from last year. The profit to distribute  to the beneficiaries/ associated entities is $2000 this tax year.