M&M Smith Pty Ltd is the trustee of the M&M Family Trust, a non-revocable inter vivos discretionary trust settled several years ago by the family’s lawyer to invest in rental properties and fixed interest deposits. The directors of M&M Smith Pty Ltd are Michelle and Mark Smith and the beneficiaries of the M&M Family Trust include Michelle, Mark and their two children, Sophie and Zoe.

For the year ended 30 June 2021, calculations revealed that the s. 95(1) net income of the trust is $65,000. The trustee has the power to distribute income as it thinks fit.

Details of the beneficiaries and their income derived from outside the trust for the year ended 30 June 2021 is as follows:

Mark is 54 years old and is employed as a schoolteacher on a part time basis deriving $55,000.

Michelle is 55 years old and is a senior employee in the Australian public service deriving $135,000.

Sophie is 22 years old and is employed as a real estate agent deriving $60,000.

Zoe is 17 years old and is a full-time student who derives no other income.

None of the above have any income tax deductions. All are residents of Australia for tax purposes.

Required

On the basis of the information provided above:

(a) Recommend a tax effective distribution of the trust’s net income to any or all the beneficiaries listed above in dollar terms based on each beneficiary’s marginal income tax rate for the year ended 30 June 2021. Note: Please ignore Medicare levy.

(7 marks)

(b) Explain in your own words and by citing and applying relevant law, how the distribution that you recommended in part (a) ought to be assessed for income tax for the year ended 30 June 2021. Broad reference ought to be made to relevant rates, but calculations of income tax payable are not required.

(15 marks)

Answer rating: 100% (QA)

a The tax effective distribution of the trusts net income to any or all the beneficiaries liste... View the full answer