I'm sorry if this is not in the best category but there was no category specific on trusts.
I was hoping if anyone can explain to me the logic behind the following:
First the background
Individual operates a business.
The business is run though a distretionary trust (and the trust owns the business asset)
The trustee is a Pty Ltd
The trust was set up with the aim to distribute as little as possible (at least early on) and to invest/reinvest as much of any income as possible into assets ranging from more business assets, real estate, and financial assets (stocks, funds etc) for the long term (i.e. to create wealth)
The trust has no specifically named beneficiaries (other than the primary beneficiary) and the trustee has full discretion whether to distribute and/or accumulate, and all the other investment powers etc that one generally finds with discretionary trusts
Second the situation/circumstance
Business generates 100K in receipts and incurs 50K in expenses leaving 50K (assume we are not quite at June 30 just yet but we are close).
The trustee is deciding that it does not need to distribute anything and so wants to invest the 50K in some assets such as stocks or maybe some land.
But, as I have been told, the trustee is first required to pay tax on that 50K (at something like 47%, which of course means the trustee can only purchase around 25K+ in stocks.
Why is this?
I would have thought that if trustee is looking to build wealth for the beneficiaries long term that this tax is counterproductive, not just for the trust but for the economy as a whole. I would also have thought that if the trustee buys assets one year and then sells those assets in a later year that the proceeds would be deemed income anyway and hence if it then distributes that income the beneficiaries will pay their respective taxes on it, which makes it seem like the tax office is double dipping.
I am sure there is an explanation as to why the tax office does this (but I can't find it), but I am perplexed as to the logic behind it, both from a micro and macro perspective.