Trustees benefit beneficiaries by making distributions of of a trust’s income or capital. Most modern trusts are discretionary trusts, which means that how much income or capital a beneficiary receives is at the trustee’s discretion. However, some trust deeds provide that different beneficiaries have varying entitlements to income and / or capital.
Distributions are not always obvious
Letting a beneficiary live in a home owned by a trustee is a capital distribution. Generally no tax consequences arise when capital distributions are made from a complying trust. However, there can be tax consequnces when capital distributions are made from non-complying or foreign trusts.
Tax consequences of capital distributions
The tax consequences of a capital distribution depends on the trust’s classification for tax purposes. Distributions, other than distributions of beneficiary income from complying trusts are tax-free. However, distributions other than beneficiary income from non-complying and foreign trusts can be taxable. Taxable distributions from non-complying trusts are taxed at the rate of 45%. Taxable distributions from foreign trusts are taxed at the beneficiary’s marginal rate.