Question 8 - Trust distributions

Jack Richkid is a 46-year-old accountant who is the Trustee of the Richkid Discretionary Trust whose beneficiaries include himself, his partner Jill (a 44-year-old voluntary social worker who did not derive any other assessable income); their son Bill (a 14 -year-old high-school student who did not derive any other assessable income) and Richkid Pty Ltd (which is a private company wholly owned by Jack).

Richkid Pty Ltd only derives investment income and therefore does not qualify as a base rate entity for income tax purposes for the year ended 30 June 201X.

In the 201W/1X year the trust generated income of $150,000, and incurred running expenses of $85,000. All the income derived by the trust is assessable for income tax purposes and all of its expenses are deductible for the 201W/1X year.

Due to his other income, Jack is taxed at the top marginal rate and wishes to minimise his tax liability by making the other beneficiaries of the Richkid Discretionary Trust presently entitled to a share of trust income (and therefore to a share of the net income of the trust).

For the year ended 30 June 201X Jack as trustee distributes the trust income on the following basis:

• 25% to Jill
• 45% to Bill
• 15% to Richkid Pty Ltd

However, Jack inadvertently fails to distribute the remaining 15% of the income of the trust to any beneficiary.

Required

Advise Jack Richkid as Trustee of the Richkid Discretionary Trust on the tax consequences of the above trust distributions for the year ending 30 June 201X, applying legislation and case law to support your answer. (15 Marks)