Bruce Whelan established the Whelan Family Trust in 1990 with ABC Pty Ltd as the corporate trustee. Bruce and his wife May are the directors of the trustee company. The trust holds a variety of investments in property and cash. The trust was established to protect the investments as Bruce is always concerned that he could be sued for negligence.

The trust records for this income year disclose the following:

Receipts ($)

80,000 Rent from investment properties

6,000 Interest from a bank account

Payments ($)

2,000 Accounting expenses for tax return

10,000 Repairs to investment properties

4,000 Interest on a loan for the investment property

1,000 Legal expenses incurred in defending a claim by a tenant

May does not work. Bruce is a senior tax manager and received a salary of $160,000 in this income year.

He has three children:

a son, John, aged 21 years, a student at university who earned $12,000 for the year;

a daughter, Kim, aged 19, also a university student who earned only $2,000 for the year; and

a second daughter, Amy, aged 16 years, a full time high school student with no other income.

Bruce has his grandmother living with him and she had no income for the year. All family members are beneficiaries of the trust. Bruce also established a corporate beneficiary and this is available to receive trust distributions.

Calculate the net income of the Whelan Family Trust for this income year and advise Bruce as to how he can distribute the net income in the most tax-effective way.

Answer

Net income of the trust:

rent	$80,000
bank interest income	6,000
accounting expenses	(2,000)
repairs	(10,000)
loan interest	(4,000)
legal expenses	(1,000)
	69,000

Distributions to beneficiaries to minimise tax liabilities:

The aim is to minimise tax by taking advantage of the differential marginal tax rates of the beneficiaries.

There are different options, but the following is one of the possibilities under which all beneficiaries except one (May in this case) do not have to pay income tax:

John: $18,200 12,000 = $6,200

Kim: $18,200 2,000 = $16,200

Amy: $416 (to avoid Child Tax at 47%)

Grandmother: $18,200

May: the balance, ie $27,984 ($69,000 6,200 16,200 416 18,200)

Answer is already complete however my question is where did they get the $18200 from?