Q&As

Q&A The right tax rate when a company receives a distribution through a chain of trusts

3 min read

15/03/24 11:30

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Here’s a question from one of our awesome members untangling the company tax rate rules when a company receives distributions through a chain of trusts.

Note that the answer is only applicable to the question asked.

Question

I have a client structure as follows:

Unit trust A operating business less than $10m turnover
Family trust B holds 100% units in unit trust A
Company C is bucket company

Scenario

In 2021-22, Unit Trust A distributed taxable trading profits of $460K to Family Trust B, which then distributed $310K of this to Company C.

Would Company C be considered a Base Rate Entity and taxed at 25% or would the company pay the 30% tax rate?

Know the answer?

If the unit trust is generating business income that is not classified as base rate entity passive income (BREPI), then this income should retain its character when it is distributed to the family trust and then to the company. This would often mean that the company is taxed at the lower rate if aggregated turnover of the group is less than $50m, although you do need to look at this carefully (e.g., check whether the family trust or company have other income etc.,).

A company will generally be treated as a base rate entity and be subject to the lower corporate tax rate if:

Its aggregated annual turnover in the relevant income year is less than $50m; AND
No more than 80% of its assessable income for the year is BREPI.

BREPI is defined to include the following types of income:

Dividends, except non-portfolio dividends;
Franking credits on the dividends referred to above;
Non-share dividends;
Interest (there are some exceptions to this);
Royalties;
Rent;
Gains on qualifying securities;
Net capital gains;
Income received from a partnership or trust to the extent that it is referable to base rate entity passive income derived by the partnership or trust.

If the company receives some distributions from a trust you need to look at the nature of the income in the hands of the trust. If the company receives income through a chain of trusts, it is necessary to trace through and look at the nature of the income in the hands of each of the trusts.

For example, if the unit trust derives some business income that is not on the list of BREPI above, some of this is distributed to a discretionary trust and this represents at least 20% of its total income for the year then this should mean that the company that receives the distributions from the discretionary trust should be a base rate entity and taxed at the lower corporate tax rate if the company has no other income for the year and its aggregated turnover is less than $50m.

Even if the company has some other income, as long as the BREPI of the company represents 80% or less of its total assessable income then it could still be taxed at the lower tax rate.

LCR 2019/5 discusses this in detail.

You can find a flowchart to assist on the knowledge base of the member-only portal (see 2.7 Flowchart Base rate entity eligibility).

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