Taxation of Trusts: Beneficiary Rights and Entitlements

This report delves into the taxation of trusts, differentiating between unit and discretionary trusts and outlining the entitlements of beneficiaries within each structure. It clarifies the concept of fixed trusts, using the life interest trust as an example, and explains the role of trustees in discretionary trusts. The report details how net income is taxed in the hands of beneficiaries and addresses the special rules applicable to capital gains, emphasizing that capital gains or losses typically arise upon the disposal of trust assets. It further explains how capital gains are distributed proportionately to beneficiaries unless they are explicitly entitled to them. Finally, the report clarifies the treatment of assets when a beneficiary is absolutely entitled, treating them as if held directly by the beneficiary for capital gains tax purposes, and highlights how capital gains can be allocated to beneficiaries, considering relevant concessions and discounts.

Running head: TAXATION OF TRUSTS
Taxation of Trusts
Name of the Student
Name of the University
Authors Note
Course ID

1TAXATION OF TRUSTS
Table of Contents
The Rights of a beneficiary........................................................................................................2
References:.................................................................................................................................4

2TAXATION OF TRUSTS
The Rights of a beneficiary
The primary difference between the unit trust and the discretionary trust is that what
are the entitlement of beneficiaries under this trust and these entitlements are distributed. The
unit trust are considered as the fixed trust where the beneficiaries along with their interests
are clearly recognized in the trust instrument based on the amount of unit held by them
(Luhmann 2018). The discretionary trust is different from the unit trusts where the
entitlement of beneficiaries are not fixed and the trustee determines how much and which
beneficiaries would receive the interest. The fixed trust is set up as living trust for estate
planning.
One of the most common form of fixed interest trust is the life interest trust where the
beneficiary would have the right to all the income of trust during their lifetime. Upon the
death of the individual, the trust property are usually paid to the named beneficiaries
(Sampford, Coghill and Smith 2016). While a trustee under the discretionary trust possess the
power of deciding which beneficiaries would get the benefit from trust and the trustee also
has the right of deciding degree of benefit one would get.
As a general rule the net income of the trust is held for tax in the hands of
beneficiaries depending upon their share of trust income. Special rules are applicable to
capital gains that are included in trust net income (Hayton, Matthews and Mitchell 2016).
Any disposal of trust assets is most probable to give rise capital gains or loss for the trust
unless the beneficiary is entitled to the asset absolutely. As the element of net income of trust,
the net capital gains made for the year is later distributed proportionately to the beneficiaries
on the basis of their entitlement to trust income except when the beneficiary is explicitly
entitled to capital gains.

3TAXATION OF TRUSTS
If the beneficiary is entitled to the assets of trust absolutely, then the assets are treated
for capital gains tax purpose as if it is held directly by a beneficiary. Any kind of actions that
are taken by the trustee in respect of asset then it is considered to have been done directly by
the beneficiary (Woellner et al., 2016). This signifies that upon the CGT event relating to the
asset, any kind of capital gains or loss would be directly made by the beneficiary and does not
forms the portion of trust’s net income. A beneficiary is entitled to the asset absolutely
provided they have the indefeasible and vested interest in the entire asset. This implies that
they can provide direction to trustee to immediately transfer the asset to themselves or to
somebody else.
Capital gains can be flowed to a beneficiary by making them explicitly entitled to
such gain (Hayton, Matthews and Mitchell 2016). On making a beneficiary specifically
entitled to the trust capital gains, the capital gains is considered while determining the net
capital gains during the income year together with the benefit of concessions or discounts to
which they are entitled.

4TAXATION OF TRUSTS
References:
Hayton, D.J., Matthews, P.B.J. and Mitchell, C.C.J., 2016. Underhill and Hayton Law of
Trusts and Trustees. LexisNexis.
Luhmann, N., 2018. Trust and power. John Wiley & Sons.
Sampford, C., Coghill, K. and Smith, T., 2016. Fiduciary Duty and the Atmospheric Trust.
Routledge.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation
Law 2016. OUP Catalogue.