Tax issues for trusts - essential reading for all trustees
A recent TO publication highlights the importance of planning for year-end trust distributions.
A recent ATO publication highlights the importance of planning for year-end trust distributions.
If, for instance, the trustee makes a resolution after 30 June, no beneficiary was presently entitled to the trust’s income by 30 June and there was no default clause in the trust deed, then the trustee will be assessed on the trust’s taxable income at the highest marginal tax rate, plus the Medicare Levy.
The ATO's Resolutions Checklist assists trustees to comply with their obligations.
A trust deed for discretionary trusts will govern which persons qualify as beneficiaries, and how the trustee is to determine the trust's income for the relevant year. The trustee must then determine which specific beneficiaries will receive the trust's net income in what proportions. Generally speaking:
- a beneficiary will only be eligible if they fall within a class of beneficiaries described in the trust deed
- a beneficiary will only be presently entitled to trust income if a trustee passes the resolution determining the specific beneficiaries by 30 June.
Therefore before a resolution is passed to determine who the eligible beneficiaries are, there is no one presently entitled to trust income. The exception is where the trust deed automatically distributes that trust income before 1 July, where the trustee has not made a determination.
The trust deed
It is essential that trustees check their trust deed and ensure they only make distributions to eligible beneficiaries.
A beneficiary refers to any person or entity for whose benefit a trust is to be administered and who is entitled to enforce the trustee’s obligations to administer the trust according to its terms.
The Tax Determination 2012/22 provides useful examples of effective and ineffective resolutions.
What is the effect of a resolution?
Having considered who are the trust's eligible beneficiaries, the effect of a resolution is to determine which beneficiaries will receive distributions, and to determine what portion of trust income they will receive for that financial year. It is therefore important to determine that:
- a beneficiary is eligible under the deed
- the resolution ensures each relevant beneficiary by operation of the resolution, becomes presently entitled to receive the trust income.
What happens if a trustee does not pass a resolution by 30 June, or at all?
- the trustee does not pass such a resolution by 30 June (or passes a resolution after 30 June)
- one or more of the distributions determined by the resolution are ineffective (say, because a determination was made to distribute income to someone who was not an eligible beneficiary),
then the trust's net (taxable) income may be assessed to the default beneficiaries or to the trustee.
A default beneficiary will only be taxed if there is a clause in the trust deed which states that if no resolution is effectively made, then beneficiaries X and Y are automatically presently entitled to the trust income (possibly in combination with other beneficiaries). Those beneficiaries are then taxed accordingly.
If no resolution is passed by 30 June and no default clause exists, then the trustee will be taxed at the highest rate. In order to avoid this, please review the resolution checklist below.
The Resolutions Checklist divides tasks up in to two lists:
- tasks to be completed before 30 June
- tasks to be completed after 30 June.
The Resolutions Checklist is extracted below.
Before 30 June
- Do you have a complete copy of your trust deed? Trustees must have a complete copy of the trust deed (including amendments) and the trustee resolution must be consistent with the terms of the trust.
- When do you have to make resolutions? Generally, the trustee must have made the trustee resolution by the end of an income year (30 June).
- Is there a standard format for a resolution? There is no standard format as there are a wide variety of trust deeds with different requirements for trustee resolutions.
- Does a resolution have to be in writing? A trustee resolution does not have to be in writing, it will depend on the trust deed, however a written record will provide better evidence of the resolution.
- How are the beneficiary entitlements defined? Ensure that the intended beneficiaries are within the class of persons who can benefit from an appointment of trust income or of trust capital (if a capital gain that is not income is to be streamed).
- Is the wording of the resolution clear? Check that the wording of the resolution is unambiguous and robust enough to deal with all eventualities.
- Are conditions on the entitlements fully effective by 30 June? ATO takes the view that a resolution would not be effective if it states that entitlements of beneficiaries would change in the event of a future adjustment by the Commissioner of Taxation.
- How should the trustee calculate the income of the trust? If the deed equates the trust's income with its net (or taxable) income, the trustee should note the Commissioner's view set out in Draft Taxation Ruling TR 2012/D1 that income cannot generally include notional amounts such as franking credits.
- Is the trustee streaming capital gains or franked distributions? Check that the terms of the deed do not prevent streaming capital gains or franked distributions and that the relevant legislative requirements have been complied with.
- Is the trustee seeking to stream other types of income? Tax attributes of other types of income besides capital gains and franked distributions cannot be separately streamed to different beneficiaries in the way that capital gains and franked distributions may be streamed.
After 30 June
- Will records created after 30 June be accepted as evidence of the making of the resolution by that date? Yes. If a resolution is validly made by 30 June, the ATO will accept records created after 30 June as evidence of the making of a resolution by that date.
- Does the trustee have to prepare the trust accounts by 30 June to make beneficiaries presently entitled to trust income? No. The trustee resolution does not need to specify an actual dollar amount for the resolution to be effective in making a beneficiary presently entitled, unless the trust deed specifically requires it.
- What happens if the trustee makes a resolution after 30 June? If no beneficiary (including a default beneficiary) was presently entitled to trust income as at 30 June, the trustee will be assessed on the trust's taxable income at the highest marginal tax rate, plus the Medicare levy.
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