A trust is not a separate taxable entity despite the fact that a return of trust income must usually be filed by the trustee and that, in certain limited circumstances, the trustee may be liable to be assessed and to pay tax on the whole or part of the trust income in that representative capacity.

In general terms, the principle of the tax law is that it is the beneficiaries who are ultimately entitled to receive and retain, or who have received, the trust income who are taxable on it. The trustee is generally taxed only on the balance (if any) to which, for a variety of reasons, no beneficiary is immediately entitled, or to which a beneficiary is immediately entitled but which the beneficiary cannot immediately receive because of some legal incapacity such as infancy or insanity. (Corporate unit trusts and public trading trusts are a special case)

Subject to certain qualifications relating to foreign-source income, trust income is taxed in the year it is derived by the trust , and it is taxed either to the trustee or to the beneficiaries, or a portion of it is taxed to the trustee and a portion to the beneficiaries. Thus, the beneficiaries may be taxed on their respective shares of the net trust income even though the trustee has not distributed that income to them by the end of the year in which it is derived. However, it is clear that, if some or the whole of the income derived in one year is taxed to the trustee or to beneficiaries who have not yet received it, it does not again become subject to tax when it is subsequently distributed to the beneficiaries.

Trust income is taxed either to the beneficiary or trustee as follows:

Undistributed foreign-source income is not taxed in the year it is derived by the trust where either: (i) the beneficiary presently entitled to it is not a resident; or (ii) if there is no beneficiary presently entitled and, subject to the special accruals measures in ITAA36 Div 6AAA of Pt III, the trust is a non-resident trust. However, the income is assessable in the income year in which it is distributed to a beneficiary who is a resident at any time during that year. Where foreign-source income to which no beneficiary is presently entitled is taxed to the trustee under sec 99 or 99A , because the trust is a resident trust, the distribution of that income to a non-resident beneficiary may entitle the beneficiary to a refund of the tax paid by the trustee.

The Government proposes to introduce a redesigned company tax regime (with a possible 30% tax rate) in the 2000/01 income year under which trusts will be taxed like companies.

The key features of the new company tax arrangements are: