In 2019 Kate purchased an investment property in the Blue Mountains for $700,000. (Kate paid a 10% down payment and borrowed the balance of the purchase price from BigBank at market rates.) Kate also paid a transfer (stamp) duty of $50,000 and legal fees of $2,000 in relation to the purchase. At the time of the purchase, the property was already rented out to tenants who continued to live in the property following the purchase. During the 2021/22 year of income, in relation to the property, Kate received rent of $40,000 and incurred the following expenses: council rates of $2,500, water rates of $500, insurance premiums of $1,000, agent’s fees of $7,000 and $40,000 interest on the loan. Kate also arranged to use the property herself as a holiday home for four (4) weeks during the year, as she enjoys bushwalking in the Blue Mountains.

Kate is also a potential beneficiary of the Smith Family Trust (SFT), an Australian resident trust. The beneficiaries are Bob and his wife Bernice, and their two children, Kate (30 years) and Kim (25 years). Bob, Bernice, Kate, and Kim are Australian residents for tax purposes. The trustee is a close family friend, Mercy. The SFT trust deed provides that:

“The Trustee may distribute all or any of the trust income to such one or more or all of the beneficiaries Bob, Bernice, Kate or Kim in such proportions as the Trustee shall in their unfettered discretion determine”.

During the 2021/22 year, the trust estate earns income calculated under trust law principles of $275,000. Mercy, the trustee, allocated the trust law income under a trustee resolution made on 27 June 2022 as follows:

Beneficiary: Share:

Kate 40%

Kim 20%

Bob 30%

Bernice 10%

SFT’s tax law income (net income calculated under s95 ITAA36) for the 2021/22 income year was $284,000.

Required:

Advise Kate regarding the income tax implications arising from the above facts. In your answer make sure you refer to any relevant cases, legislative provisions, tax rulings, and principles of tax law.