In the face of mounting workloads and the stress that may accompany them, accountants should be wary of the concept of “specific entitlement”, and be aware of the specific requirements that need to be followed in trust distribution minutes, said John Jeffreys, tax counsel at Tax & Super Australia.
“Many accountants employ the use of template minutes across their practice,” Mr Jeffreys said. “Great caution must be exercised when using such ‘one size fits all’ approaches, as [they] can often be the case that the template minutes do not properly fit the terms of a trust deed.
“This can result in beneficiaries being taxed in unexpected ways or, possibly, the distribution being ineffective. If the distribution minute is ineffective, the income of the trust will be taxed to the trustee at the top marginal rate.”
Accountants should be warned that trust distribution minutes need to comply with the terms of the particular trust deed that is related to the trust, Mr Jeffreys said, and agents should individually consider whether distributions are being made to valid beneficiaries, and how income is defined in the trust deed.
He also urged accountants to consider whether any type of income or gain should be streamed to selected beneficiaries and whether the trust deed empowers the trustee to do so, whether any person, like an appointer, needs to approve the trustee’s distribution decisions.
Whether amounts are being distributed to foreign residents should also be considered, he said. If so, Mr Jeffreys said, practitioners should consider whether there are any withholding tax or trustee tax implications.
Mr Jeffreys said the concept of specific entitlement in relation to trust capital gains and franked distribution can, in his experience, be often misunderstood among practitioners, and they should approach it with extra caution in the coming weeks.
“Some years ago, the law was changed to make the streaming of capital gains and franked distributions possible following the decision in the Bamford High Court Case,” Mr Jeffreys said.
“The concept of ‘specific entitlement’ was introduced to facilitate streaming to beneficiaries and the law has a number of specific requirements that must be followed in trust distribution minutes and accounting records to enable this streaming.
“Accountants are strongly encouraged to ensure they understand these concepts when drafting trust distribution minutes.”
Mr Jeffreys said that, in some cases, the knock-on effects of COVID-19 could see some practitioners give consideration to whether the trust is a resident of Australia.
“This could occur where the trustees are individuals and they have been overseas for a prolonged period,” Mr Jeffreys said. “Is the central management and control of the trust now in Australia? Also, are the beneficiaries now residents of Australia?
“Accountants should also be aware of the very recent decisions handed down by the Full Federal Court in the Greensill and N & M Martin Holdings cases.
“These decisions confirmed the ATO position that a capital gain made by a trust from the disposal of non-taxable Australian property to a foreign resident is subject to tax in Australia.”
