The infancy of any child apply any income of the

the infancy of any child apply any income of the trust, and, as the Trustee deems
necessary, any portion of the corpus towards the maintenance of an infant child in
such manner as the Trustee selects.”
In this example the trustee has a discretion as to who will ultimately benefit under the trust.
Additionally the trustee may apply income of the trust otherwise accumulating towards the
maintenance of a child. Additionally the trustee may encroach upon capital in order to
provide for the maintenance of a child. Finally, the trustee may select the form of the
maintenance; e.g. a payment to a guardian of the child or a payment to the child’s school.
As a general rule the classification of a trust is a matter of convenience. It has no legal
significance. Attaching a label to a particular trust – this is a discretionary trust; this is a
family trust; this is a discretionary family trust etc – is a useful way of conveying some basic
sense of a particular trust without entering into any detailed account.

The Tax Treatment of Trusts
A trust is a unique legal arrangement. Unsurprisingly, trusts present a unique problem for an
income tax. The problem or issue is this: Who is to be taxed on income of the trust?
Suppose we have a very simple trust in which T owns bonds (the bonds are issued by Xco) on
trust for B the beneficiary. Xco pays interest on the bonds to the registered owner of the
bonds. This is T. T as trustee pays the income of the trust to B. Formally it is T who has
derived income. In substance the benefit of the trust property (this is the income produced by
the bonds) belongs to B. Who then should we tax on the income arising, T or B?
Note that the issue that arises is different from the issue that arises where we have a company
and a shareholder. A company may carry on a business and derive income. Subsequently the
company may pay a dividend to its shareholder. Should we tax only the company, should we
tax only the shareholder, or should we tax both company and shareholder? A strong case can
be made that the company should be taxed on its business profit and the shareholder should
be taxed on her dividend income. Many income taxes do exactly this. This is the classical
treatment for the taxation of companies and dividends.
In the case of a trust arrangement no income tax countenances taxing both the trustee and the
beneficiary on trust income. This is an either/or story. Tax either T or B, but not both, on the
income arising.
So which is the preferable answer? Tax law, as we know, looks to the substance of matters. In
a trust, the trustee formally owns trust property, but in substance trust property belongs to the
beneficiary. If tax law is to attend to the substance, then prima facie, it is the beneficiary who
should be taxed.
I add the qualifier ‘ prima facie ’ because one can imagine situations where the income of a
trust for a year is not in that year derived by any beneficiary. Suppose a trust deed directs the
trustee to accumulate the income of the trust for ten years and then at the end of the ten years
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