Do you have a family trust (also known as a discretionary trust)?
The purpose of a trust is to separate the legal and beneficial ownership of assets. The legal ownership of the asset rests with the trustee. The beneficiaries benefit from the income that flows from the assets.
A trust is not a legal entity. It is best described as a legal “relationship” that is controlled by the trustee of the trust under the terms of the trust deed.
The ATO have tightened the requirements around the distribution of income. Decisions around the nature & distribution of the income & resolutions about that are documented by trust minutes detailing how the trust’s income is to be distributed need to be signed prior to 30th June each year. If they aren’t completed, you could end up paying a lot more tax than you intended.
What you need to do…
Calculate the net income for tax purposes (distributable income) and who will be entitled to receive it in accordance with the trust deed (rules of the trust).
Document this in a resolution that is to be signed prior to 30 June OR contact us & we will work with you to prepare everything.
Background
Your trust’s net income for tax purposes (distributable income) is distributed annually to beneficiaries who will be entitled to receive it, in accordance with the trust deed (rules of the trust).
Since 2010 as a result of decision from a High Court case (Commissioner of Taxation v. Bamford) which clarified the meaning of income of the trust estate and share of income.
ATO legislation requires that your trust’s distributable income be calculated and the allocation of the income to beneficiaries for the current financial year needs to be determined before 30 June.
Trust minutes are used to inform the Australian Tax Office (ATO) of the allocation.
The trust distribution minutes also avoid default beneficiaries unexpectedly becoming presently entitled to the income and being taxed on it.
TD 2012/22 provides examples on how the trust distribution minute can impact the parties involved with a trust.
How much extra tax will I pay if they aren’t done by before 30th June?
The consequences for being unable to produce the trust distribution minutes to the ATO is that no beneficiary was presently entitled to receive the income.
If no beneficiary (including a default beneficiary) was presently entitled to trust income as at 30 June, and no beneficiary was made specifically entitled to trust capital gains (if any), then you (the trustee) will be assessed on the trust’s net (taxable) income at the highest marginal tax rate plus the Medicare levy (47% in 2022).
What is in the minutes?
There is no specific format mandated by the ATO however valid trust distribution minutes must provide clear methodology of the determination of each beneficiary’s entitlement. It is important that the minutes are prepared accurately and reference your trust’s deed.
Beneficiaries can specifically be entitled to franked dividends and capital gains included in that income as well as specifically entitled to capital gains forming part of the trust capital, on the terms of your trust deed.
Does it need to be in writing?
Whether the resolution must be recorded in writing will depend on the terms of your trust deed. However, a written record (minutes) will provide better evidence of the resolution and avoid a later dispute with the ATO or with relevant beneficiaries, as to whether any resolution was made.
A written record will be essential if you want to effectively stream capital gains or franked distributions for tax purposes. This is because a beneficiary can only be specifically entitled to franked dividends or capital gains if this entitlement is recorded in writing in the records of the trust either by 30 June for franked dividends or by 31 August for capital gains.
Distributing income from a trust
Who is…
Trustee
The trustee is the controlling mind of the trust. A trustee can be an individual or a number of individuals. A trustee can also be an entity, such as a company. The trustee has a fiduciary duty to administer the trust for the benefit of the beneficiaries. A fiduciary relationship is one of the utmost good faith. The trustee must only act in accordance with the trust deed and relevant trust legislation. The trustee is the legal owner of the assets of the trust, but not the beneficial owner.
A trust is a discretionary trust when the trustee has the absolute discretion as to how the income and capital of the trust is distributed to beneficiaries.
Trust deed
The trust deed is a legal document signed by the creator of the trust, called the settlor. It gives instructions to the trustee as to how the trust is to be administered and what activities it can engage in. It also names and specifies the beneficiaries of the trust. The trust deed is a very important document.
Appointor
The appointor(s) are the individuals that appoint the trustee and can change the trustee. It is important that a trust always has a living appointor.
Distribution minute
In most cases, by 30 June each year, the trustee must determine the distributable income of the trust. The trustee must then decide how the distributable income of the trust is to be distributed among the beneficiaries. This includes the amount of the distributions and also the type of distributions (e.g. capital gains and franked distributions).
Beneficiaries
The beneficiaries are those that may benefit from the income and capital of the trust. Usually, there are primary beneficiaries defined in the trust deed and most other beneficiaries will be related or connected to the primary beneficiaries. Beneficiaries can be entities and do not have to be human beings.
Taxation
Income distributed to adult beneficiaries and beneficiaries that are entities are taxed to those beneficiaries. The trustee is taxed on income distributed to child beneficiaries. The trustee is also taxed, often at the top marginal tax rate, if there is income of the trust that has not been distributed to a beneficiary.
Useful links
Help me!
Horizon Group – Trust resolution preparation
$260 (incl gst)
Includes:
Estimate of distributable income
Preparation of trust resolution for year end 30 June 2022
In accordance with Trust deed
Trust Deed review
