Distribution of trust's income
Scenario:
My family trust (Kent Family Trust, KFT) carries on a business in the food industry, a small business; The discretionary beneficiaries include Dominic (me) and Rebecca (my wife) Kent, two children (Sally and Thomas, both under 18 years old).
Dominic and Rebecca are employed and jointly own some passive investments, tax income (2016/17) are $130,000 each (disregarding any distributions from KFT).
My family trust’s Net income is $62,000 comprising of:
- Gross trading income $80,000
- Deductible expenses ($22,000)
- Franked dividends ($14,000 &$6,000 franking credits) $20,000
- Net rental income from investment property $15,000
- Net capital gain from the sale of a business asset $3,000
- Tax advisers fee ($3,000)
- Expenses related to managing the share portfolio ($1,000)
- Prior year losses ($30,000)
- Net income $62,000
According to the trust deed, the distributable income of the trust is equal to its net income for tax purposes.
My wife, Rebecca (Trustee of the KFT), distributes all the income (2016/17). Please advise how to effectively distribute the income of the trust.
Explanation:
The definition of the ‘net small business income’ is in ITAA97 s 328-365; Base on ITAA97 s 328-360, a taxpayer’s small business income tax offset will be equal to 5% of tax payable on total net small business income’ (up to $1,000).
So, your family trust’s net small business income only includes $80,000 (gross trading income), other incomes do not relate to its business.
Base on ITAA97 s 328-365, only the deduction $22,000 can be reduced. (share portfolio expenses and tax adviser expenses are excluded)
So, net small business income = $80,000-$22,000= $58,000
According to ITAA97 s 328-375, your children cannot access the offset in relation to small business income that is distributed to them from the trust. Your wife should distribute $416 to each minor because any distribution exceeding that amount will be taxed at punitive minors’ rates.
So, it would be advisable to stream $832 of the net capital gain ($416 each) to them.
Note that the low-income tax offset is not available in relation to family trust distributions.
There remains $61,168 ($62,000-$832, including net capital gain $2,168=$3,000-$832 & $59,000=$62,000-$3,000 other net income) of trust income for distribution to you and your wife.
So, to each:
- $1,084 net capital gain ($2,168/2)
- $29,500 other net income ($59,000/2), including $29,00 small business net income of the trust ($58,000/2)
- Step 1, Determine the proportion of basic income tax liability that relates to small business activities:
- Total net small business income/ Taxable income
- =$29,000/ ($130,000+$1,084+$29,500)
- =$29,000/$160,584
- =0.18
Step 2, Basic income tax liability on $160,584
- According to the 2016/17 tax rates, tax payable on $160,584= $47,048
- So, basic income tax liability= $47,048 *0.18 = $8,469
Step 3, Calculate the small business tax offset:
Tax offset = $8,469 *5%= $423 (<$1,000)
Therefore, you and your wife can each claim a tax offset of $423.