Avoiding extra tax with a
Trust Distribution Resolution

The ATO is increasingly paying attention to trusts’ ability to distribute income to the most tax-advantaged entities.

For example, capital gains are generally better for individuals, as they get a 50% tax discount on capital gains. In contrast, franked dividends can go to companies, as they usually have a similar rate of tax.

 

It’s important to be aware that the ATO now mandates that Trust Distribution Resolutions be finalised and submitted before 30 June. This means that a Trust must distribute all of its income each financial year, or else the Trustee will be liable to pay tax on the income.

Consider the scenario where a Trustee of a Trust neglects to make a resolution to distribute the income of the Trust before the end of the financial year. In such a case, the Trustee could face an assessment by the Australian Taxation Office (ATO) on the Trust income at the highest marginal tax rate of 47%. This is a stark contrast to the intended beneficiaries, who would typically be taxed at significantly lower rates. It’s crucial to note that due to the ATO’s increased audit activity, there has been a heightened focus on such compliance items.

Trustees should resolve to distribute the current year’s income on or before the financial year-end (30 June) to ensure the beneficiary is presently entitled to trust income. To do this, you will need to:
1. Review your Trust Deed
2. Review your projected income for the year ending 30 June, and
3. Prepare your Trust Distribution Resolution for your Family Trust and execute it as the Trustee.

What we are doing to help you.

With the evolving changes to the tax law and how the ATO regulates things, we have found that preparing a trust distribution resolution before the end of the financial year can be pretty complex.  The result is that many clients need help to comply with the trust taxation laws and to be tax efficient.

The work involved and the steps we usually undertake on behalf of clients include:

• Review of your prior year’s Trust Distribution Resolution – we may have this on file already.
• Confirmation with you of the estimated Trust income of your Trust for the year ended 30 June.
  (If you use accounting software such as Xero, MYOB or QBO, we can log in and check this for you.)
• Review your Trust Deed to ensure that the income definition and distribution clauses in your Trust Deed allow for the Trust Distribution Resolution devised for you.
  (We usually recommend that it is updated if your deed is more than four years old.)
• Advise you on the most tax-effective distribution of this estimated Trust income.
  (Typically an additional project as it includes a separate Tax Planning Meeting or Report).
• Preparation of Trust Distribution Resolution and ensuring the Trustees sign it before the 30 June deadline.

Benefits and value to you.

Continual changes to trust taxation laws add complexities to the annual year-end compliance for Trust entities.

So by having AustAsia prepare and organise for you to sign the Trust Distribution Resolution for each of your Discretionary Trusts before 30 June:

• Your Trust will not be assessed 47% tax on your Trust profits
• Instead, your intended beneficiaries will pay tax at their lower tax rates.
• Ensures the Trust remains compliant with the requirements of the Australian Taxation Office.
  (Failure to do so may result in additional tax for the trustee and/or beneficiaries.)
• Covers off any variation in the future income of the Trust.
• Ensures the trustees are aware of their requirements concerning calculating and distributing the Trust’s net income.

While we usually review the income and most tax-effective way to distribute income when finalising your tax returns, now the ATO is telling us this needs to be compleated before 30 June each year.

 

By completing the work now, we minimise any adverse impact should the ATO decide to conduct a review.

 

See Also The ATO’s aggressive stance on trusts and trust distributions