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Australia Taxation – Advanced study materials
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Australia Taxation – Advanced practice questions

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Question 1Taxation of business entities and structures

A resident company has an aggregated turnover of $8 million for the income year. Which company tax rate applies to its base rate entity taxable income for that year?

  1. The full corporate rate of 30%
  2. The rate depends on the number of shareholders
  3. The base rate entity rate of 25% Correct answer.
  4. The rate is 27.5% for all small companies

Explanation

A base rate entity is one with aggregated turnover below the threshold (currently $50 million) and no more than 80% of assessable income being passive (base rate entity passive income). Such a company is taxed at 25% rather than the full 30% corporate rate. The 27.5% rate was phased out and no longer applies.

Question 2Taxation of business entities and structures

A partnership has two equal partners. It derives $200,000 of net partnership income for the year. How is that income taxed?

  1. The income is taxed only when distributed by cash
  2. The partnership is exempt as a flow-through vehicle
  3. Each partner includes $100,000 in their own assessable income Correct answer.
  4. The partnership pays company tax on the $200,000

Explanation

A partnership is not a taxable entity; it is a flow-through vehicle. Each partner includes their share of the net partnership income (here $100,000 each) in their own assessable income and pays tax at their own marginal rates. The partnership only lodges a return to disclose the income and its allocation.

Question 3Taxation of business entities and structures

A discretionary trust makes a beneficiary presently entitled to trust income before year end. Who is assessed on that share of net trust income?

  1. The appointor of the trust
  2. The trustee at the top marginal rate
  3. The beneficiary who is presently entitled Correct answer.
  4. The trust itself as a separate taxpayer

Explanation

Where a beneficiary is presently entitled to a share of trust income and is not under a legal disability, that beneficiary is assessed on their share of the net trust income at their own rates. The trustee is taxed only in default situations, such as where no beneficiary is presently entitled.

Question 4Taxation of business entities and structures

Which of the following is a core requirement for a company to be a base rate entity for an income year?

  1. It must have at least 20 employees
  2. It must distribute all profits as dividends
  3. It must be wholly Australian owned
  4. Its aggregated turnover must be below the threshold and passive income limited Correct answer.

Explanation

To be a base rate entity a company must satisfy two conditions: aggregated turnover below the prescribed threshold and no more than 80% of assessable income being base rate entity passive income. Employee numbers, ownership residency and dividend policy are not relevant tests.

Question 5Taxation of business entities and structures

A sole trader earns $150,000 of business income and has $40,000 of deductible business expenses. How is the net amount taxed?

  1. It is exempt because it is business income
  2. At the individual marginal rates on $110,000 Correct answer.
  3. At the company rate of 25%
  4. At a flat small business rate of 15%

Explanation

A sole trader is not a separate legal or taxable entity; business income and deductions are combined with other personal income and taxed at the individual's marginal rates. The net business income here is $110,000, included in the individual's assessable income.

Question 6Taxation of business entities and structures

A company pays a $70,000 dividend franked to 100% at the 30% corporate rate. What is the franking credit attached to the dividend?

  1. $70,000
  2. $21,000
  3. $30,000 Correct answer.
  4. $10,000

Explanation

The franking credit is calculated as the dividend multiplied by the corporate tax rate divided by one minus that rate. For a $70,000 dividend at 30%, the credit is $70,000 × 0.30/0.70 = $30,000. This credit represents the tax already paid by the company.

Question 7Taxation of business entities and structures

A company incurs a tax loss in the current year. Under the carry-forward rules, which test principally governs whether it can deduct that loss in a later year?

  1. The employee continuity test
  2. The continuity of ownership test or the business continuity test Correct answer.
  3. The dividend payout ratio test
  4. The number of directors test

Explanation

A company may deduct a prior-year tax loss if it satisfies the continuity of ownership test, or failing that, the business continuity test (the same business test, or the similar business test for losses). These tests ensure the loss is carried forward only where ownership or the business has substantially continued.

Question 8Taxation of business entities and structures

A partnership makes a franked distribution to a partner. How is the franking credit treated for that partner?

  1. It is refunded in cash by the partnership
  2. It is included in the partner's assessable income with a corresponding offset Correct answer.
  3. It is ignored because partnerships are transparent
  4. It is taxed only at the partnership level

Explanation

In a partnership, the franked distribution and its attached franking credit flow through to the partners. Each partner includes their share of the franked distribution and the franking credit in assessable income and may claim a tax offset for the credit.

Question 9Taxation of business entities and structures

A trust distributes income to a beneficiary who is a non-resident. Which statement best describes the trustee's position on that share?

  1. The trustee may be assessed on the beneficiary's share where the beneficiary is a non-resident Correct answer.
  2. The trustee is never assessed on trust income
  3. The non-resident beneficiary is always exempt
  4. The income is taxed only in the beneficiary's home country

Explanation

Where a beneficiary is presently entitled but is a non-resident, the trustee can be assessed on that share of the net trust income under the trustee assessment provisions. This ensures Australian tax is collected on the Australian-source trust income despite the beneficiary's absence.

Question 10Taxation of business entities and structures

A company makes a loan to a shareholder who is also an employee, and the loan is not repaid by the lodgment day. Which provision is most relevant to the tax treatment?

  1. Division 7A of the income tax law Correct answer.
  2. The general anti-avoidance provisions only
  3. The franking credit rules
  4. The debt/equity rules

Explanation

Division 7A treats certain payments, loans and forgiven debts from a private company to shareholders or their associates as unfranked dividends unless repaid or placed on complying terms. A loan outstanding at lodgment day is the classic trigger for Division 7A.

Question 11Taxation of business entities and structures

A corporate tax entity has a franking account surplus. What does this indicate?

  1. The company owes additional tax to the ATO
  2. The company has no franking credits available
  3. The company has paid more tax than required and may frank distributions Correct answer.
  4. The company is exempt from franking

Explanation

A franking account surplus means the company has franking credits available, generally reflecting tax paid, which it can attach to distributions to shareholders. A deficit indicates it has over-franked and may be liable for franking deficit tax.

Question 12Taxation of business entities and structures

A company is a subsidiary member of a consolidated group. Which statement about its tax position is correct?

  1. Each subsidiary lodges its own separate tax return
  2. Subsidiaries are exempt from tax entirely
  3. The group must be a partnership
  4. The head company is treated as a single entity for income tax purposes Correct answer.

Explanation

Under the consolidation regime, the head company and its subsidiary members are treated as a single entity for income tax purposes. The head company lodges the group's return, and intra-group transactions are generally ignored.

Question 13Taxation of business entities and structures

A partner contributes an asset to a partnership. Which concept determines whether a taxing event arises on the contribution?

  1. The base rate entity test
  2. The franking credit rules
  3. Whether the asset is transferred to the partnership at arm's length value Correct answer.
  4. The CGT small business concessions

Explanation

Contributing an asset to a partnership can be a CGT event. The CGT provisions generally treat the partner as disposing of the asset to the partnership, with the consideration being the arm's length value of the asset, which can trigger a gain or loss.

Question 14Taxation of business entities and structures

A trust makes a capital gain and has no beneficiary presently entitled to that gain. How may the trustee be assessed?

  1. The gain is deferred indefinitely
  2. The gain is taxed at the company rate
  3. The trustee is assessed at the top marginal rate on the net trust income Correct answer.
  4. The gain is automatically exempt

Explanation

Where no beneficiary is presently entitled to trust income, the trustee is assessed on the net trust income at the highest marginal rate. This prevents income from escaping tax or being held in the trust untaxed.

Question 15Taxation of business entities and structures

A private company pays a dividend to a shareholder on 30 June. When is the franking credit generally included in the shareholder's assessable income?

  1. Never, because franking credits are not assessable
  2. Only when the shareholder sells the shares
  3. In the income year in which the dividend is paid Correct answer.
  4. Two years after the dividend is paid

Explanation

A franked distribution is included in the shareholder's assessable income in the income year the dividend is paid, together with the attached franking credit. The shareholder then claims a tax offset for the franking credit.

Question 16Taxation of business entities and structures

Which of the following best describes the tax treatment of a company's carry-forward capital losses?

  1. Capital losses are deductible against ordinary income without restriction
  2. Capital losses expire after one year
  3. Capital losses are applied only against capital gains, subject to the loss tests Correct answer.
  4. Capital losses are refundable in cash

Explanation

Capital losses may only be offset against capital gains, not against ordinary assessable income. For companies they are carried forward subject to the continuity of ownership and business continuity tests, and they do not expire after a single year.

Question 17Taxation of business entities and structures

A company distributes a dividend franked to 50% at the 30% rate. A resident shareholder on a 45% marginal rate receives $10,000 cash. What franking credit applies?

  1. $3,000
  2. $5,000
  3. $1,500
  4. $2,143 Correct answer.

Explanation

The maximum franking credit is $10,000 × 0.30/0.70 = $4,286, and at 50% franking the credit is half of that, approximately $2,143. The shareholder includes the dividend plus credit in income and claims the credit as an offset.

Question 18Taxation of business entities and structures

A beneficiary of a trust is under a legal disability. Who is generally assessed on that beneficiary's share of net trust income?

  1. The trustee on the beneficiary's behalf Correct answer.
  2. The beneficiary personally at their marginal rate
  3. No one is assessed
  4. The appointor

Explanation

Where a beneficiary is presently entitled but under a legal disability (for example, a minor), the trustee is generally assessed on that share of the net trust income on the beneficiary's behalf. The beneficiary is not personally assessed while under the disability.

Question 19Taxation of business entities and structures

A company has an aggregated turnover of $60 million. Which tax rate generally applies to its taxable income?

  1. 15%
  2. 27.5%
  3. 30% Correct answer.
  4. 25%

Explanation

A company with aggregated turnover of $60 million exceeds the base rate entity turnover threshold, so it is taxed at the full corporate rate of 30%. The reduced 25% rate is confined to base rate entities.

Question 20Taxation of business entities and structures

Which of the following is a key difference between a discretionary trust and a fixed trust for tax purposes?

  1. Fixed trusts cannot distribute franking credits
  2. Discretionary trusts pay company tax
  3. Only fixed trusts are flow-through vehicles
  4. In a discretionary trust, entitlement to income depends on trustee resolution Correct answer.

Explanation

In a discretionary trust, beneficiaries do not have fixed entitlements; the trustee resolves annually who receives income. In a fixed trust, beneficiaries hold defined interests. Both are generally flow-through vehicles for tax purposes.

Question 21Taxation of business entities and structures

A company receives a fully franked dividend from another Australian company. How is the franking credit generally treated for the recipient company?

  1. It is refunded only if the company is a base rate entity
  2. It is included in assessable income with an offset, subject to the franking credit trading rules Correct answer.
  3. It is ignored
  4. It is taxed at 15%

Explanation

An Australian company receiving a franked distribution includes the dividend and franking credit in assessable income and claims an offset, subject to the holding period and related franking credit trading rules. These rules prevent trading in franking credits.

Question 22Taxation of business entities and structures

A company seeks to deduct a carried-forward loss and fails the continuity of ownership test. Which test may still allow the deduction?

  1. The base rate entity test
  2. The same business test or similar business test Correct answer.
  3. The arm's length test only
  4. The dividend imputation test

Explanation

If the continuity of ownership test is failed, a company may still deduct prior-year losses if it satisfies the business continuity test. Depending on the loss year, this is either the same business test or the more flexible similar business test.

Question 23Taxation of business entities and structures

A private company forgives a debt owed to it by a shareholder. Which outcome is most consistent with Division 7A?

  1. The shareholder receives a capital loss
  2. The company must pay franking deficit tax
  3. The forgiven amount may be treated as an unfranked dividend to the shareholder Correct answer.
  4. The forgiveness is ignored for tax purposes

Explanation

Division 7A extends beyond loans and payments to include the forgiveness of a debt owed by a shareholder or associate. A forgiven debt can be treated as an unfranked dividend in the shareholder's hands unless an exclusion applies.

Question 24Taxation of business entities and structures

A trust has net trust income comprising both ordinary income and a capital gain. A beneficiary is presently entitled to all the ordinary income but not the capital gain. How is the capital gain generally treated?

  1. It remains with the trustee, who may be assessed at the top rate Correct answer.
  2. It is taxed at the company rate
  3. It is assessed to the beneficiary as ordinary income
  4. It is automatically exempt

Explanation

Entitlement is determined by the character of the income. If a beneficiary is presently entitled only to ordinary income and not to the capital gain, the gain is not assessed to that beneficiary. Where no beneficiary is entitled to the capital gain, the trustee may be assessed on it at the top marginal rate.

Question 25Taxation of business entities and structures

A company joins a consolidated group mid-year. Which principle generally governs the treatment of its tax losses on entry?

  1. Losses may be transferred to the head company subject to the loss integrity rules Correct answer.
  2. Losses remain with the subsidiary and cannot be used
  3. Losses convert to capital losses
  4. All losses are automatically forfeited

Explanation

On consolidation, tax losses of subsidiary members can generally be transferred to the head company, but the loss integrity rules (such as the available fraction and modified continuity tests) apply to prevent trafficking in losses. Losses are not automatically forfeited.

Question 26Taxation of business entities and structures

A resident individual receives a fully franked dividend of $700 from an Australian company, with $300 of franking credits attached. The individual's marginal rate is 39% including Medicare levy. What is the net tax payable or refundable on the dividend, ignoring any other offsets?

  1. Tax payable of $300
  2. A refund of $90 Correct answer.
  3. A refund of $300
  4. Tax payable of $390

Explanation

Grossed-up dividend income is $1,000 ($700 cash plus $300 franking credit). Tax at 39% is $390, and the $300 franking credit is applied as a tax offset, leaving $90 payable. Because the individual's rate is below the corporate rate, the excess credit produces a refund.

Question 27Taxation of business entities and structures

An Australian company has a corporate tax rate of 25% and pays a dividend with franking credits calculated at that rate. What is the maximum franking credit per $100 of dividend?

  1. $30.00
  2. $33.33 Correct answer.
  3. $20.00
  4. $25.00

Explanation

The maximum franking credit equals the dividend multiplied by the corporate tax rate divided by one minus that rate. For $100 at 25%, that is $100 × 0.25/0.75, which is $33.33. The credit reflects the tax the company is assumed to have paid on the profit distributed.

Question 28Taxation of business entities and structures

A beneficiary of a discretionary trust is made presently entitled to trust income but is a non-resident at year end. Which statement best describes the trustee's position on that share of net trust income?

  1. The beneficiary is assessed only in their country of residence and Australia imposes no liability
  2. The trustee is not assessed because present entitlement removes any trustee liability
  3. The trustee is assessed at the top marginal rate on the beneficiary's share because the beneficiary is a non-resident Correct answer.
  4. The trustee is assessed at the corporate tax rate applicable to companies

Explanation

Where a beneficiary is a non-resident and the income is not subject to withholding, the trustee is generally assessed on the beneficiary's share of net trust income. The trustee is taxed at the top marginal rate, reflecting the beneficiary's inability to be taxed directly in Australia. This prevents trust income escaping Australian tax.

Question 29Taxation of business entities and structures

A partnership of two individuals makes a $50,000 profit for the year. How is that profit taxed?

  1. Profits are taxed only when distributed to partners as drawings
  2. The partnership pays tax at the top marginal rate as a separate entity
  3. Each partner includes their share of partnership net income in their own assessable income Correct answer.
  4. The partnership pays tax at the corporate rate and partners receive franked distributions

Explanation

A partnership is not a taxable entity; it computes net income and each partner includes their share in their own assessable income. Partners are taxed at their individual marginal rates on that share. The partnership lodges a return but does not pay tax itself.

Question 30Taxation of business entities and structures

A company has an aggregated turnover of $40 million and is not a base rate entity. Which corporate tax rate applies to its taxable income?

  1. 27.5%
  2. 39%
  3. 30% Correct answer.
  4. 25%

Explanation

A company that is not a base rate entity is taxed at the general corporate rate of 30%. The base rate entity rate of 25% applies only where the aggregated turnover threshold and passive income tests are met. With turnover of $40 million, the company exceeds the base rate entity threshold.

Question 31Taxation of business entities and structures

A private company makes a loan to a shareholder during the year. The loan is not repaid and no minimum yearly repayment is made. Which outcome is most consistent with Division 7A?

  1. The loan reduces the company's franking account balance
  2. The loan is treated as a dividend only when the shareholder defaults on interest
  3. The loan is ignored if documented in writing
  4. The loan is treated as a dividend paid to the shareholder in the year the loan is made Correct answer.

Explanation

Division 7A treats certain loans to shareholders or their associates that are not repaid or put on complying terms by the lodgment day as dividends. The amount is included in the shareholder's assessable income as an unfranked dividend. Written documentation alone does not prevent this unless the loan meets the Division 7A requirements.

Question 32Taxation of business entities and structures

A company makes a loan to a shareholder that is placed on complying Division 7A terms with a minimum yearly repayment. Which statement best describes the treatment of that loan?

  1. The loan is treated as a dividend in full in the year it is made
  2. The loan is not treated as a dividend provided the minimum yearly repayment is made each year Correct answer.
  3. The loan is treated as a dividend only if the shareholder is also a director
  4. The loan is treated as a dividend regardless of repayment terms

Explanation

A loan that is put on complying Division 7A terms and on which the minimum yearly repayment is made is not treated as a dividend. The complying loan agreement must specify an interest rate at or above the benchmark rate and a maximum term. Failure to make a required repayment can result in a deemed dividend for the shortfall.

Question 33Taxation of business entities and structures

A company has carried-forward tax losses and wishes to deduct them. It fails the continuity of ownership test. Which test may still allow the losses to be deducted?

  1. The same business test Correct answer.
  2. The base rate entity test
  3. The continuity of business test
  4. The small business entity test

Explanation

Where the continuity of ownership test is failed, the same business test may permit losses to be deducted if the company carries on the same business and does not derive income from new kinds of business or transactions. This test preserves losses where ownership changes but the business continues unchanged. It is an alternative to the ownership test.

Question 34Taxation of business entities and structures

A company with a 30% tax rate pays a dividend of $7,000 franked to 100%. A resident shareholder on a 45% marginal rate (including Medicare levy) receives the dividend. What is the shareholder's net tax position on the dividend?

  1. Tax payable of $3,000
  2. Nil, because the dividend is fully franked
  3. Tax payable of $1,500 Correct answer.
  4. A refund of $1,500

Explanation

The franking credit is $3,000 ($7,000 × 30/70), giving grossed-up income of $10,000. Tax at 45% is $4,500, and after applying the $3,000 franking credit the shareholder pays $1,500. A fully franked dividend is not automatically tax-free for a shareholder on a higher marginal rate.

Question 35Taxation of business entities and structures

A discretionary trust derives income during the year. Which statement best describes how that income is taxed if no beneficiary is made presently entitled before year end?

  1. The trustee is assessed on the net trust income at the top marginal rate Correct answer.
  2. The income is taxed at the corporate rate as if the trust were a company
  3. The income is exempt because no beneficiary is presently entitled
  4. The income is taxed in the hands of the default beneficiary at their marginal rate

Explanation

Where no beneficiary is presently entitled to trust income, the trustee is generally assessed on the net trust income at the highest marginal rate. This prevents income from being retained in a trust untaxed. The trustee's liability is a penalty-style rate reflecting the absence of a presently entitled beneficiary.

Question 36Taxation of business entities and structures

A trust makes a capital gain and also has ordinary income. A beneficiary is presently entitled to a share of the trust income but the trust deed does not specify how capital gains are allocated. Which outcome is most consistent with the trust loss and streaming rules?

  1. The capital gain is taxed to the trust as a separate entity
  2. The capital gain may be taxed to the trustee if it is not streamed to a beneficiary in accordance with the rules Correct answer.
  3. The capital gain is exempt because it is not ordinary income
  4. The capital gain is automatically streamed to the beneficiary entitled to ordinary income

Explanation

Capital gains can be streamed to beneficiaries only if the trust deed permits and the streaming requirements are met. If a capital gain is not validly streamed, the trustee may be assessed on it. Ordinary income entitlement does not automatically carry the capital gain.

Question 37Taxation of business entities and structures

A company joins a consolidated group partway through the year. Which principle generally governs the treatment of its tax losses on entry?

  1. All losses are automatically transferred to the head company regardless of ownership
  2. Losses are permanently forfeited on joining the group
  3. Losses may be transferred to the head company subject to the group's loss integrity rules and ownership tests Correct answer.
  4. Losses remain with the subsidiary and cannot be used within the group

Explanation

On consolidation, losses of subsidiary members may be transferred to the head company, but the transfer is subject to the loss integrity rules, including ownership and business continuity tests. Not all losses transfer automatically. The consolidation provisions determine how losses are allocated and used within the group.

Question 38Taxation of business entities and structures

A company makes a franked distribution to a shareholder and also has a franking deficit at year end. Which statement best describes the consequence of a franking deficit?

  1. The company is exempt from franking obligations for the following year
  2. The company's dividend is automatically unfranked
  3. The company must pay franking deficit tax and may be subject to a penalty Correct answer.
  4. The company receives a refund of franking credits

Explanation

A franking deficit at the end of the income year generally triggers franking deficit tax, and a penalty may apply where the deficit exceeds 10% of franking credits arising during the year. The deficit tax is offset against future franking surpluses. This discourages over-franking of distributions.

Question 39Taxation of business entities and structures

A partnership incurs a loss for the year. How is that loss treated for the partners?

  1. The loss is forfeited and cannot be used
  2. Each partner's share of the loss is taken into account in their own tax position, subject to relevant tests Correct answer.
  3. The loss is carried forward by the partnership as an entity
  4. The loss is deductible only against future partnership profits

Explanation

A partnership does not carry forward losses as an entity; each partner's share of the partnership loss is taken into account in determining their own taxable income. Non-commercial loss rules may defer an individual partner's loss. The loss flows through to partners rather than being retained by the partnership.

Question 40Taxation of business entities and structures

A company has a franking account surplus at year end. Which statement best describes what this indicates?

  1. The company must pay franking deficit tax
  2. The company cannot pay any further dividends
  3. The company has franking credits available to frank future distributions Correct answer.
  4. The company has overtaxed its shareholders and must refund them

Explanation

A franking account surplus means the company holds franking credits that can be attached to future frankable distributions. It reflects corporate tax paid and franking credits received. A surplus does not create a refund or obligation to shareholders.

Question 41Taxation of trusts, partnerships and flow-through arrangements

A resident discretionary trust derives assessable income of $180,000 in the current income year and has no capital gains or exempt income. Under the trust loss rules in Schedule 2F of the ITAA 1936, which factor is most relevant in determining whether the trust can deduct a prior-year revenue loss against that income?

  1. Whether the trust satisfies the tests in Schedule 2F, including the 50% stake test or the pattern of distributions test, or qualifies under the family trust election provisions Correct answer.
  2. Whether the trustee has resolved to distribute all income before 30 June of the loss year
  3. Whether the trust has lodged its annual return within the extended lodgment date
  4. Whether the trust's beneficiaries are all residents of Australia for tax purposes

Explanation

The trust loss rules in Schedule 2F of the ITAA 1936 restrict the deduction of prior-year losses unless the trust satisfies specified tests (such as the 50% stake test, pattern of distributions test, or control test) or has made a valid family trust election. Residency of beneficiaries and lodgment timing do not determine deductibility of trust losses.

Question 42Taxation of trusts, partnerships and flow-through arrangements

A fixed trust has two beneficiaries each presently entitled to 50% of trust income. One beneficiary is a resident individual and the other is a non-resident individual. The trust derives $100,000 of Australian-source rental income. How is the income taxed?

  1. Each beneficiary is assessed on $50,000, with the non-resident's share subject to non-resident rates and no tax-free threshold Correct answer.
  2. The trustee is assessed on $50,000 and the resident beneficiary on $50,000
  3. The resident beneficiary is assessed on $100,000 because the non-resident cannot be presently entitled
  4. The trustee is assessed on all $100,000 at the top marginal rate

Explanation

Where beneficiaries are presently entitled to trust income, they are assessed on their proportionate share under Division 6 of Part III of the ITAA 1936. The non-resident beneficiary's share is taxed at non-resident rates without the tax-free threshold. The trustee is not assessed where there is present entitlement and no beneficiary under a legal disability.

Question 43Taxation of trusts, partnerships and flow-through arrangements

Which of the following best describes the tax treatment of a partnership for Australian income tax purposes?

  1. The partnership is a separate taxable entity that pays tax on partnership income at company rates
  2. The partnership pays tax on behalf of partners and issues dividend imputation credits
  3. The partnership lodges a return disclosing income but is not liable to tax; partners are assessed on their individual interest in the net partnership income Correct answer.
  4. The partnership is disregarded entirely and each partner lodges a separate return with no partnership return required

Explanation

Under section 91 of the ITAA 1936, a partnership is not liable to pay tax on partnership income; instead, partners are individually assessed on their interest in the net income or partnership loss. The partnership must lodge an annual return disclosing the income and each partner's share.

Question 44Taxation of trusts, partnerships and flow-through arrangements

A discretionary trust makes a beneficiary presently entitled to trust income on 30 June, but the trustee resolves to pay the amount on 15 August of the following income year. When is the beneficiary taken to have derived the income for tax purposes?

  1. On the date the beneficiary's individual return is lodged
  2. On 15 August, when the amount is actually paid
  3. On the date the trust return is lodged
  4. On 30 June, when present entitlement arises Correct answer.

Explanation

Under section 95A and the present entitlement rules in Division 6, a beneficiary is taken to derive trust income when they become presently entitled to it, not when it is paid. The 30 June resolution therefore fixes derivation in that income year.

Question 45Taxation of trusts, partnerships and flow-through arrangements

Which statement correctly describes the treatment of a capital gain made by a trust for a beneficiary who is presently entitled to trust capital?

  1. The trustee is always assessed on the capital gain at the top marginal rate
  2. The capital gain flows through to the beneficiary, who is assessed under the CGT provisions as if they had made the gain Correct answer.
  3. The capital gain is taxed in the hands of the trustee at company rates
  4. The capital gain is exempt because trusts cannot make capital gains

Explanation

Where a beneficiary is presently entitled to trust capital (or specifically to a capital gain), the gain flows through and the beneficiary is treated as having made the capital gain under the CGT provisions in Part 3-1 of the ITAA 1997. The trustee is only assessed where no beneficiary is presently entitled or a beneficiary is under a legal disability.

Question 46Taxation of trusts, partnerships and flow-through arrangements

A partnership has two equal partners. The partnership derives $80,000 of business income and incurs $30,000 of deductible expenses. It also has $10,000 of exempt income. What is each partner's share of net partnership income for tax purposes?

  1. $25,000 Correct answer.
  2. $40,000
  3. $30,000
  4. $20,000

Explanation

Net partnership income under section 90 of the ITAA 1936 is assessable income less deductions, excluding exempt income. That gives $50,000, and each equal partner includes $25,000 in their assessable income. Exempt income is excluded from net partnership income.

Question 47Taxation of trusts, partnerships and flow-through arrangements

Which of the following is a key requirement for a valid family trust election under Schedule 2F of the ITAA 1936?

  1. The trust must specify a single individual as the test individual and must not have made a prior election Correct answer.
  2. The trust must be a unit trust with at least 50 members
  3. The trust must be managed by a corporate trustee
  4. The trust must distribute all income equally to beneficiaries each year

Explanation

A family trust election requires the trustee to specify a test individual and to make the election in the approved form. The election allows the trust to access the trust loss rules and franking credit rules more flexibly, but it also imposes family control and distribution tests.

Question 48Taxation of trusts, partnerships and flow-through arrangements

A partner in a partnership contributes an asset to the partnership in exchange for an interest. Which statement best describes the CGT consequence for the contributing partner?

  1. CGT event A1 may occur, but roll-over may be available where the asset is contributed to the partnership and certain conditions are met Correct answer.
  2. The gain is deferred permanently and never subject to tax
  3. No CGT event occurs because partnerships are transparent
  4. The partnership must recognise the gain and distribute it to all partners equally

Explanation

Contributing an asset to a partnership can trigger CGT event A1 (disposal) for the contributing partner. However, Subdivision 122-A of the ITAA 1997 may provide roll-over where the asset is transferred to the partnership in exchange for an interest meeting the conditions. The gain is not permanently exempt.

Question 49Taxation of trusts, partnerships and flow-through arrangements

A trustee of a discretionary trust resolves to distribute trust income to a beneficiary who is a resident individual, but the beneficiary is under 18 and the income is from a business carried on by the trust. Which statement is correct regarding the taxation of that income?

  1. The income is always taxed at the trustee's rate under section 99A
  2. The income is taxed to the minor's parents automatically
  3. The income is exempt because minors cannot be presently entitled
  4. The income is taxed to the minor under Division 6AA unless the minor is excepted, in which case normal marginal rates apply Correct answer.

Explanation

Division 6AA of Part III of the ITAA 1936 applies penalty rates to certain trust distributions to minors, but exceptions exist, including where the minor is engaged in a business or the income is from a deceased estate. Where an exception applies, ordinary marginal rates apply to the minor.

Question 50Taxation of trusts, partnerships and flow-through arrangements

A unit trust distributes income to unitholders. Which of the following is most relevant to whether the unit trust is treated as a fixed trust for trust loss purposes?

  1. Whether the trust has made a family trust election
  2. Whether the trustee is a resident of Australia
  3. Whether the trust has more than 50 unitholders
  4. Whether the trust's unitholders have fixed entitlements to income and capital, and whether the trust satisfies the tests in Schedule 2F Correct answer.

Explanation

Schedule 2F treats fixed trusts differently from discretionary trusts; a fixed trust generally requires fixed entitlements to income and capital, and must satisfy the relevant tests (such as the 50% stake test) or have made a family trust election. The number of unitholders and trustee residency are not the defining criteria.