4.7.3.20 Assessable Income from Discretionary Trusts pre-01/01/2002

Summary

This topic provides information on the following:

  • assessment of income from discretionary trusts (1.1.D.200),
  • assessment of trust income which includes franking credits (1.1.F.175),
  • description of assessment of income for different roles within trusts, and
  • assessment of income to trust beneficiaries.

Note: For the income test treatment of general business items also see 4.7.1.20. The assessment of general business items applies to all business structures including sole traders, partnerships, private trusts and private companies.

Act reference: SSAct section 8(1)-'income'

Policy reference: SS Guide 4.7.3.60 Summary of Assessable Income from Trusts pre-01/01/2002

Assessment of income

An income support recipient who is a beneficiary of a discretionary trust, receives income from the trust ONLY when:

  • the trustee allocates or distributes a part or all of the trust income to them, or
  • trust income that is allocated to them is reinvested in the trust, or
  • the trustee makes a payment out of allocated income on their behalf.

Example: Rent or rates.

Allocations and distributions are assessed as income for 12 months from the date of the resolution to distribute.

Assessment of franking credits

The following table describes the assessment of trust income which includes franking credits.

If an income support recipient is… Then the…
a pensioner or allowee,
  • cash dividends paid to them are held as income for 12 months from the date of the resolution to distribute, under SSAct section 1073, and
  • franking credits paid with the dividend ARE income for the purposes of either the pensions or allowances income test.

Explanation: Franking credits are also known as imputation credits (1.1.I.25).

Description of income assessment for different roles within trusts

The following table describes the roles of individuals within a trust and the treatment of their trust related income. A person may have more than one role, and each needs to be considered separately.

Role Description
Settlor Does NOT usually receive income from the trust, but the deprivation provisions MAY apply.
Contributor

MAY receive income from interest on loans. The deprivation of income provisions MAY apply.

Deeming applies to the:

  • balance of any loan, or
  • value of a deprived asset (1.1.D.110).
Beneficiary

MAY receive distribution of income or capital at the discretion of the trustee.

Further information on assessment of income to trust beneficiaries is provided in this topic.

Trustee MAY receive wages, fees, or salary. The current rate payable is held as on-going income. Reimbursement of 'out of pocket' annual expenses is NOT income.

Assessment of income to trust beneficiaries

Distribution of income to beneficiaries is maintained for 12 months.

Explanation: A beneficiary who received a trust distribution of an amount in one year may not automatically receive a distribution of the trust profits (1.1.P.428) in the following year.

Distribution of profits from discretionary trusts are treated as non-periodical income.

Explanation: An income support recipient who is a beneficiary of a discretionary trust has no rights to the trust income, even if they are also trustees. A beneficiary receives a distribution solely at the trustees discretion in accordance with the terms of the trust deed.

Act reference: SSAct section 1073 Certain amounts taken to be received over 12 months

Date of effect for trust distributions from discretionary trusts

A beneficiary is entitled to receive an amount under a discretionary trust when the trustee exercises their power under the trust deed and makes a RESOLUTION to distribute in favour of the beneficiary. Allocations and distributions are assessed as income for 12 months under SSAct subsection 1073(1) from the date of the resolution to distribute.

There may be instances where a resolution to distribute was made but the trust tax return has not been lodged at the time of resolution. Where this is the case, the onus is on the income support recipient to find out how much s/he is entitled to receive. Distribution income should still be assessed from the date the resolution was made and not from the date the tax return was lodged.

An example would be where a resolution was made on 1 July 2001, but the tax return was done on 1 October 2001. The income support recipient, as trustee, may know of the distribution prior to receipt, or may be ignorant of the distribution until it is paid. In either case, assessment is from the date of resolution which is the 1 July 2001.

Distributions from discretionary trusts when a resolution to distribute an amount of profits is made, but the total profit is not yet known

A person is entitled to receive the amount when they have an absolute vested interest in the amount and are legally able to demand payment of the amount. A person cannot demand payment of an unspecified amount and therefore is entitled to receive the amount only when a figure is specified.

Where there has been a resolution to distribute an unspecified amount, the distribution only becomes assessable when the person becomes entitled to legally demand a specific amount.

Example: A trustee makes a resolution in July to make a profit distribution of $700 to one person, and total profit less $700 to another. In October the accountant has determined the profit of the trust to be $1,000. The first person has a legally enforceable right to $700 from July, and this amount is assessed from then. The other person is assessed when their exact entitlement becomes known, so their $300 is assessed from October.

Last reviewed: 3 January 2017