How income bypasses a trust using the conduit principle.

How income bypasses a trust using the conduit principle

Trusts are taxed at 45%, but that rarely matters because they should not earn taxable income, and, if they do, it should bypass the trust completely. Here's how.

Provided taxable income received by or accrued to a trust is distributed to a beneficiary prior to the trust's tax year end (28 February), then it may flow through a pipe, or conduit, directly to the beneficiary without touching the trust at all.

Conduit

The nature of the income is unchanged. That is, a dividend remains a dividend, interest remains interest, rent remains rent, a capital gain remains a capital gain etc, and is taxed in the hands of the beneficiary as if the trust did not exist.

This means that the trust does not need a bank account to receive or distribute the income and does not need to register as a taxpayer (because it does not earn taxable income).

Whilst this can be advantageous if the beneficiary is on a low marginal tax rate, the downside is that it siphons wealth out of the trust whose very purpose was to grow wealth and protect it from creditors and taxes on death. It would have been far better if the trust never earned income in the first place and that is achieved by interposing a company between the trust and the investment, then the company pays the tax.


Derek Springett, CEO of HArbour & AssociatesNeed more valuable advice about trusts?

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