Navigating tax season is crucial for businesses structured as trusts. Understanding the unique obligations and benefits associated with trusts can help you manage your tax responsibilities efficiently. This guide provides essential information for Australian taxpayers operating businesses through trusts, complete with examples and tables.
Understanding Trusts and Their Taxation
Trusts are widely used for business structures due to their flexibility and potential tax benefits. Here’s an overview of how trusts are taxed in Australia.
Types of Trusts
While there are several types of trusts, this guide focuses on the four most commonly used for business purposes: discretionary trusts, unit trusts, hybrid trusts, and fixed trusts. These types of trusts are frequently employed due to their flexibility, tax benefits, and suitability for various business needs. Understanding how these trusts are managed and taxed can help you navigate the complexities of tax season more effectively and ensure compliance with ATO requirements.
- Discretionary Trusts: Often used by families, these trusts give trustees the discretion to distribute income among beneficiaries.
- Unit Trusts: Beneficiaries hold fixed units, similar to shareholders in a company.
- Hybrid Trusts: Combine elements of discretionary and unit trusts.
- Fixed Trusts: Beneficiaries have fixed interests in the trust’s income or capital, providing clear and predictable distributions.
Taxation Basics
Income generated by a trust is generally taxed in the hands of the beneficiaries, not the trust itself. This means that the trust distributes its income to the beneficiaries, who then report it in their personal tax returns and are taxed at their respective marginal tax rates. The trustee must ensure that all income is distributed to avoid the trust being taxed at the highest marginal rate.
For example, consider a discretionary trust that generates $100,000 in income. If the trust distributes $60,000 to Beneficiary A and $40,000 to Beneficiary B, each beneficiary includes their share in their personal tax return and is taxed at their marginal rates.
Tax Rates for Beneficiaries
Beneficiaries are taxed at their personal income tax rates. These rates are subject to change every year, so it is advisable to refer to the Australian Taxation Office (ATO) website for the latest information and updates. Here’s a quick reference to the current tax rates:
2024 Income Year
Australian resident individual income tax rates 2023 – 24
2025 Income Year
Australian resident individual income tax rates 2024 – 25
These rates help you understand the tax liability based on your income. Note that the Medicare Levy (up to 2%) is not included in these rates.
Small Business Tax Concessions for Trusts
Trusts that qualify as small businesses can take advantage of various tax concessions to reduce their tax burden. Here’s a table summarising key concessions:
GST Concessions
Key Tax Obligations for Trusts
Pay As You Go (PAYG) Instalments
Trusts may need to pay PAYG instalments based on their expected annual tax liability. This helps manage cash flow and avoid large tax bills at year-end.
Business Activity Statements (BAS)
If your trust is registered for GST, you must lodge BAS monthly, quarterly, or annually. This involves reporting GST collected and claiming GST credits.
Capital Gains Tax (CGT)
CGT applies when the trust sells an asset for a profit. Trusts that hold the asset for more than 12 months can benefit from the 50% CGT discount.
Example: Tax Scenario for a Discretionary Trust
Consider a discretionary trust earning $150,000 in income. The trustee decides to distribute the income as follows:
- $50,000 to Beneficiary A (Individual).
- $70,000 to Beneficiary B (Individual).
- $30,000 to Beneficiary C (Corporate).
Each beneficiary reports their share on their tax return, which is taxed at their applicable rate.
Taxation for Individual Beneficiaries (A and B):
Beneficiary A and Beneficiary B include their distributions in their personal tax returns and are taxed at their marginal tax rates according to the individual income tax rates mentioned earlier.
Taxation for Corporate Beneficiary (C):
Beneficiary C is a company, and therefore, the $30,000 distribution it receives from the trust will be taxed at the corporate tax rate.
In Australia, the corporate tax rate varies depending on the company’s annual turnover:
- Base Rate Entities: Companies with an aggregated turnover of less than $50 million and that derive no more than 80% of their income from passive sources (such as interest, dividends, and rent) are taxed at a lower rate. As of the latest updates, this rate is 25%.
- Other Companies: Companies that do not qualify as base rate entities are taxed at the standard corporate tax rate, which is 30%.
Assuming Beneficiary C qualifies as a base rate entity, the tax on the $30,000 distribution would be calculated at the 25% rate.
Calculation:
- Income Received: $30,000
- Corporate Tax Rate: 25%
- Tax Payable: $30,000 * 25% = $7,500
So, Beneficiary C (the corporate beneficiary) would pay $7,500 in tax on the $30,000 distribution. If Beneficiary C were taxed at the standard corporate rate (30%), the tax payable would be $9,000.
Record Keeping and Compliance
Effective record-keeping is vital for trusts to ensure compliance and optimise tax benefits. Here’s how to maintain effective records:
System Setup
Utilise digital tools that integrate with ATO systems for seamless record and tax filing management. Software like Xero, MYOB, and QuickBooks offer features that link directly with ATO online services, simplifying tasks like submitting BAS and tax returns.
Additionally, the ATO app itself is a valuable resource, providing tools for recording deductions, tracking your superannuation, and even calculating the tax you owe.
Smartphone Apps for Receipt Management
Apps like Receipt Bank by Dext and Expensify simplify the task of digitising receipts and tracking expenses. By using your smartphone’s camera, you can quickly capture and categorise receipts, ensuring they are easily accessible for tax purposes and audits. These apps often offer cloud storage, which means your data is secure and retrievable anytime from any device.
Documentation
Keep detailed records of income, distributions, expenses, and asset purchases. For example, maintain logs for all transactions and store digital receipts and invoices.
Consequences of Poor Record-Keeping
Failing to keep accurate records can lead to disallowed deductions, audits, and penalties. For instance, if a trust cannot substantiate a claimed expense during an audit, the deduction may be denied, increasing taxable income and resulting in fines.
Engaging a bookkeeper or accountant can also be invaluable. They can help maintain orderly records, prepare financial statements, and ensure compliance with tax laws, freeing up your time to focus on core business activities.
Including these tools and practices in your record-keeping strategy can help ensure your trust remains compliant and maximises its tax benefits.
Avoiding Common Tax Mistakes
Even experienced trustees can fall into tax pitfalls, but these common mistakes can be avoided with careful planning and professional guidance:
Inaccurate Records
Not keeping detailed records of expenses and incomes is a frequent oversight that can lead to disallowed deductions and penalties during an audit. It’s crucial to maintain a comprehensive record of every financial transaction throughout the year. Use digital tools and apps to scan and store receipts, invoices, and other important documents.
Overlooking Deductible Expenses
Many trustees miss out on key deductions simply because they aren’t aware of what can be claimed. For example, failing to claim home office expenses, professional development costs, or specific business-related purchases can result in higher taxable income. Regularly review the ATO guidelines or consult a tax professional to ensure you are taking advantage of all available deductions.
Missing Deadlines
Failing to submit tax returns, BAS, and PAYG instalments on time can result in fines and interest charges. Setting electronic reminders and engaging a tax professional can help ensure that all filings are made promptly. Additionally, if you use a tax agent, ensure they are registered with the ATO to benefit from extended lodgement deadlines.
Not Reporting All Income
Sometimes, income is forgotten or overlooked, such as occasional freelance work or cash jobs. All income must be reported to the ATO to avoid potential issues with undeclared income. Implementing a robust accounting system can help track all sources of income accurately.
Misunderstanding GST Obligations
Trusts registered for GST must account correctly for it on all applicable transactions. Incorrectly claiming GST credits or failing to charge GST where required can lead to significant penalties. Ensure your accounting software is set up to manage GST correctly and regularly review your GST obligations.
Poor Management of PAYG Instalments
PAYG instalments need to be closely aligned with expected tax liabilities. Underestimating earnings can lead to a large tax bill at the end of the year, while overestimating can stifle cash flow. Work with your accountant to accurately forecast income and determine appropriate PAYG instalment amounts.
Improper Deductions for Personal Expenses
Claiming personal expenses as business expenses is a common error that can lead to audits and penalties. Trustees must clearly differentiate between business and personal spending. For example, if a vehicle is used for both personal and business purposes, only the business-related portion of expenses can be claimed.
Important Deadlines and ATO Requirements
Tax Return Deadlines
- 31 October 2024: Lodgement Deadline
This is the due date for trustees to lodge their tax returns for the 2023-2024 financial year if they are preparing and lodging their own return without a tax agent. - 15 January 2025: Lodgement Deadline for Corporate Trustees
If the trustee is a company, the tax return must be lodged by 15 January 2025. - 15 May 2025: Tax Agent Deadline
If the trust uses a registered tax agent, the lodgement deadline is extended to 15 May of the following year. This extension allows more time for tax agents to manage their clients’ returns. - 5 June 2025: Late Lodgement for Non-Taxable Entities
For trustees or beneficiaries that had non-taxable or credit assessments in the previous year, the final lodgement date is extended to 5 June, provided all other criteria are met.
BAS Reporting
- Monthly, quarterly, or annually, depending on your registration.
PAYG Instalments
- 21 July, 21 October, 21 January, and 21 April:
Due date for quarterly pay-as-you-go (PAYG) instalments for trusts that pay their taxes in instalments throughout the year.
Superannuation Contributions
- Due quarterly if the trust employs staff and makes superannuation contributions on their behalf.
CGT Events
- Must be reported in the tax year when the asset is sold.
Trust Distribution Resolutions
- 30 June: Trust distribution resolutions must be made before the end of the financial year to ensure that the income of the trust is appropriately distributed to beneficiaries. Failure to do so can result in the trust income being taxed at the highest marginal rate.
For specific due dates and any additional requirements, consult the ATO or your accountant. Keeping track of these important dates can significantly reduce the stress associated with tax season and ensure compliance with tax obligations for trusts.
Professional Help for Trusts
Engaging professional accountants like us can help trusts navigate complex tax laws, ensuring compliance and optimising tax strategies. Benefits include:
- Compliance Assurance: Our accountants ensure that your business remains compliant with all ATO regulations, helping you avoid penalties and fines.
- Strategic Advice: Our team provides tailored advice that helps you plan for future investments, understand tax implications, and drive business expansion. This support is crucial for strategic growth and long-term sustainability.
- Audit Support: Our accountants offer crucial support during audits, providing expert guidance and ensuring that your financial records are accurately represented to the tax authorities.
Preparing for tax season doesn’t have to be stressful for businesses with a trust structure. Understanding your obligations, utilising available concessions, maintaining accurate records, and seeking professional advice can make the process smoother and more efficient. Reach out to our team of accountants to ensure your trust is well-prepared for tax season, maximising your tax advantages and ensuring compliance with all regulations.
Trusts Tax Return Cost
The cost of preparing and lodging a tax return for a trust can vary significantly based on several factors, including the complexity of the trust’s structure, the type and amount of income generated, the deductions and credits applicable, and the specific goals and circumstances of the beneficiaries. Each trust is unique, and the tax preparation process must be tailored to reflect its individual characteristics.
For example, a relatively simple trust with straightforward income sources and standard deductions may require less time and effort to prepare, resulting in lower costs. On the other hand, a more complex trust involving multiple beneficiaries, diverse income streams (such as rental income, dividends, and business profits), and significant investments might necessitate detailed documentation, extensive calculations, and multiple consultations. This complexity naturally leads to higher preparation costs.
To provide an accurate estimate, it is essential to discuss your trust’s specific needs with our team. We recommend speaking directly with one of our chartered accountants to receive a personalised quote. We can offer tailored solutions that cater to your unique requirements, ensuring that your trust’s tax return is prepared accurately and efficiently. Contact us today to schedule a consultation and find out how we can assist you with your trust’s tax preparation needs.
