Taxation of trusts, partnerships and flow-through arrangements
Flow-through vehicles are tested through net income calculations, present entitlement, streaming, trust loss rules and the anti-avoidance overlay of section 100A. Partnership allocation and Division 7A interactions with corporate beneficiaries are also fair game.
Trust net income and present entitlement
- The trustee derives income as legal owner; section 95 net income is assessable income less deductions.
- Beneficiaries are assessed on the share of net income to which they are presently entitled (s 97); the trustee is assessed under section 99 or 99A at 45% where there is no present entitlement or the beneficiary is under a legal disability.
- Streaming of capital gains and franked distributions under Division 6E requires power in the deed, a recorded resolution before 30 June and notification to beneficiaries by the earlier of the lodgment due date or actual lodgment.
Section 100A and corporate beneficiaries
- Reimbursement agreements attract ATO scrutiny under PCG 2022/4, which grades arrangements into white, green and red zones; an unpaid present entitlement to a company is generally a Division 7A loan unless a complying sub-trust is established.
Trust losses and elections
- Schedule 2F tests include the 50% stake test, pattern of distributions test, income injection test and control test; a family trust election (with 20% tracing) simplifies the tests but imposes family group distribution restrictions.
Worked example
A discretionary trust receives $150,000 rent, $90,000 interest and a $600,000 gain on shares held three years, with $30,000 deductions. The 50% discount reduces the gain to $300,000; net income = $150,000 − $30,000 + $300,000 + $90,000 = $510,000. The trustee streams the gain to beneficiary A and splits the remaining $210,000 equally between B and C. A is assessed on $300,000, B and C on $105,000 each.
Partnerships
- Section 90 computes partnership net income; each partner includes their share under the agreement and pays tax at their own rates.
- A partner's "salary" is an allocation of profit, not a deductible expense; partnership losses flow to partners but individual partners face the Division 35 non-commercial loss rules.
Traps
- Streaming without deed power or after year-end.
- Failing to notify beneficiaries by the deadline.
- Treating a corporate beneficiary's unpaid entitlement as permanent deferral.
- Missing the family trust election deadline.