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Trust Tax Deductions

Similar to individuals and other entities, trusts are entitled to claim tax deductions on certain expenses incurred in the course of managing or distributing assets.

The necessary connection between the expenses incurred and income is required for deductibility.

A trust is a legal entity that can hold assets for the benefit of beneficiaries.

Types Of Tax Deduction Claimable By A Trust

Common types of tax deduction claimable by a trust may include:

  • Expenses incurred in connection with trading or other income earning activities
  • Administrative expenses, such as fees paid to trustees, filing fees, accounting expenses, and other costs associated with the management and operation of the trust itself
  • Non-capital investment expenses and donations
  • Capital expenses to the extent allowed under the depreciation rules
  • Although not a tax deduction as such, the taxable income of a trust will normally exclude legal distributions to beneficiaries.

Where there is a discretion available under the Trust Deed, most of the time, trustees will seek to distribute all income. This is because income retained in a trust and not distributed is usually taxed at the highest rate.

The above is very general advice and cannot be relied upon for any course of action.. There are exceptions and circumstances which may indicate to the contrary, and professional advice is recommended.

Discretionary Trust Beneficiary Deductions

When managing a small business through a discretionary family trust, beneficiaries who manage the business declare their share of net trust income on their tax returns.

Beneficiaries in these circumstances will often incur expenses associated with the Trust’s trading activities, and may be dismayed to learn that they cannot claim a deduction for these expenses directly.

The reason is that because the net income is calculated and distributed at the discretion of the Trustee(s), there isn’t a connection between the expense and the income at the time it (the expense) was incurred.

Expenses typically the subject of this issue are phone and vehicle costs.

There are ways around this which require a little planning and forethought.

They include:

  1. If there is sufficient connection with the trusts taxable activities, the trust could reimburse the expenses and claim a tax deduction for the reimbursed expenses.
  2. If the beneficiary earned income from the trust as a contractor or employee, the expenses may be claimed against that income (again assuming sufficient income/expense connection).

Again, this is not legal or tax advice and cannot be relied upon without first discussing your circumstances with a professional advisor.

Be aware also that these issues may also potentially involve Fringe Benefits Tax if incorrectly structured.

Further reading:

This page was last modified on 2024/05/07