If a beneficiary is presently entitled to a share of the trust income and is under 18 years of age, the trustee is assessed and is liable to pay tax on that income as if it were the income of an individual. A beneficiary deriving income from other sources in addition to the trust income is assessed on the total income in their personal tax return. A credit is allowed in the individual’s return for the amount of tax paid or payable by the trustee on the trust income.
Beneficiaries who are under 18 years old are excluded from the TFN withholding rules for closely held trusts. You do not have to withhold amounts from payments to beneficiaries under 18 years old who have not provided a TFN.
For more information about the TFN withholding rules for closely held trusts, see TFN withholding for closely held trusts.
If a beneficiary is under 18 years old at 30 June in the income year (a minor beneficiary), special taxation provisions apply to their income (eligible income) unless the beneficiary is an excepted person or the income is excepted income.
To work out whether a minor beneficiary is an excepted person or whether their trust income is excepted income or eligible income, see Appendix 9.
If a minor beneficiary is an excepted person, the trustee pays tax on the beneficiary’s share of net trust income at the normal individual rates if the beneficiary is a resident or at non-resident rates if they are a non-resident.
If a minor beneficiary is a prescribed person, the trustee pays tax on the beneficiary’s trust income as follows:
- For a resident beneficiary, the trustee pays tax on the excepted trust income at the normal individual rates and pays tax on the beneficiary’s eligible trust income at higher rates applicable to a resident.
- For a non-resident beneficiary, the trustee pays tax on the excepted trust income at the non-resident rates and pays tax on the beneficiary’s eligible trust income at higher rates applicable to a non-resident.
The following notes assume that a trustee is entitled, on behalf of a resident beneficiary, to the full tax-free threshold of $18,200. Where a beneficiary becomes or ceases to be an Australian resident, a reduced tax-free threshold may apply.
Rates for excepted income
If a minor resident beneficiary’s share of the trust net income consists wholly of excepted income, or includes an amount of eligible income not exceeding $416 and the beneficiary is not entitled to a share of the net income of any other trust, the trustee pays tax at normal individual rates. If a non-resident minor beneficiary’s share of the trust net income consists wholly of excepted income, the trustee pays tax at the rates normally applying to non-residents.
Rates for eligible taxable income
Table 10.1 sets out the higher tax rates that apply to the eligible taxable income of a minor who was a resident for the full income year.
Note: The first $416 of eligible income is taxed at the normal individual rates. If the beneficiary has no other income, no tax is payable on the first $416.
Table 10.2 sets out the higher tax rates that apply to the eligible income of a minor who was a non-resident for the full income year.
If a beneficiary receives distributions of eligible income from more than one trust, the sum of the eligible income from those distributions is taken into account in working out the tax rate to apply.
If a minor beneficiary’s share of trust income includes eligible taxable income subject to higher tax rates as well as excepted income, the tax on the excepted income (and up to $416 of the eligible income if the beneficiary is a resident) is first calculated at normal individual rates as if that income were the taxable income. In this way beneficiaries who are resident for the full income year apply the zero rate of tax on the first $18,200 and the 19% rate from $18,201 to $37,000 on the taxable income which is excepted income.
Eligible taxable income is then taxed at the higher rates set out in the relevant table above.
The trustee pays tax in respect of the beneficiary on excepted income at normal individual rates, plus the tax on the eligible income at the higher rate, less allowable tax offsets and other credits.
The low income tax offset and the low and middle income tax offset do not reduce tax payable on eligible income of minors. The low income tax offset and the low and middle income tax offset are available to be applied against excepted income.
In a limited number of cases, where eligible income of a resident is within a range with a tax rate less than 45 cents in the dollar as set out in tables 10.1 and 10.2, tax calculated on the beneficiary’s share of net trust income at normal individual rates would exceed the tax calculated separately on the excepted income and eligible income components. In such cases, the trustee pays tax on the beneficiary’s net trust income at normal individual rates. If the beneficiary is a non-resident, similar calculations are made using the rates that normally apply to non-residents.
Relieving provisions
Under Part 4-50 of Schedule 1 to TAA, release from an individual’s obligation to pay certain tax liabilities may be granted where the Commissioner is satisfied that payment of those liabilities would cause serious hardship. The release provisions also relate to the minor beneficiary’s obligation to pay additional tax, pursuant to these provisions.
Beneficiaries who are owners of farm management deposits (FMDs)
If a beneficiary is under a legal disability and is the owner of an FMD made during the year of income, the trustee is not taxed on the share of net income to which the beneficiary is presently entitled. The beneficiary is treated as if no legal disability exists and will be assessed on their individual return, in respect of their share of net income of the trust estate and their claim for the FMD deduction.