Determining Tax Liability on Increased Net Income:
The party responsible for paying tax on an increase in net (taxable) income of a trust depends on several factors:
Definition of Trust Income: If the trust deed includes an income equalisation clause, an increase in net (taxable) income generally leads to a rise in trust income.
Distribution of Trust Income: Tax liability depends on whether trust income was distributed and how it was done. A trust resolution or default beneficiary clause in the deed can affect this.
Drafting of Distribution Resolution: How the resolution was drafted matters. For instance, using a "balance beneficiary" helps mitigate risks if income isn't accurately quantified or if it increases later.
Tax Implications Scenarios:
Increase in Trust Income: If the increase in net (taxable) income results in higher trust income, beneficiaries may be taxed on their share.
No Increase in Trust Income: If the net (taxable) income rises but trust income remains unchanged, the tax implications differ.
Tax Tip - Distributing Trust Income:
For tax purposes, trust income is crucial. Beneficiaries are taxed based on their share of the net (taxable) income, derived from their entitlement to trust income. This proportionate approach ensures fair taxation based on beneficiaries' entitlements.
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