The regulator says that as the 30 June deadline for trust resolutions approaches, it’s crucial for trustees and their advisers to be clear about their obligations, and this checklist can help trustees avoid basic trust errors that can arise if they don’t fully understand their obligations or take reasonable care to get things right.
The first thing to ensure is that trustees understand how income is defined for the trust estate.
Trustees must be familiar with their trust deeds and accurately determine the income of the trust estate for each financial year. Common errors include actions inconsistent with the deed, mistaking accounting profit for distributable income, and misinterpreting trustee powers.
To avoid these errors, trustees should review the trust deed, distribute income according to each beneficiary’s entitlements, and review the trust deed to understand how it defines income.
Second, trustees need to correctly identify the beneficiaries of their trust. Errors often occur when trustees fail to read the deed, distribute to non-beneficiaries, or distribute outside the family group when a family trust election (FTE) or interposed entity election (IEE) is in place.
To prevent these mistakes, trustees should identify beneficiaries as per the trust deed and ensure all entitled beneficiaries quote their TFN and are notified of their entitlement.
The third item on the ATO’s checklist says trustees must make valid resolutions to appoint or distribute income to beneficiaries by 30 June of the relevant tax year. If resolutions aren’t made by this date, the trustee may be liable for all trust income and taxed at their marginal rates.
Invalid resolutions and back-dated resolutions can be avoided by reading the trust deed and making clear and timely resolutions.
Fourth on the checklist is to identify any family trust elections (FTE) or interposed entity elections (IEE).
A family trust is a trust where the trustee has made a valid FTE. Family trusts can access tax concessions, but distributions made outside the family group will trigger family trust distributions tax (FTDT). This is a specific 47 per cent tax payable by the trustee on the distribution. The Commissioner has no discretion with FTDT once it is triggered. Therefore, trustees should be vigilant about existing FTEs or IEEs in place and maintain accurate records.
The ATO said it is seeing an increase in trustees distributing outside the family group triggering FTDT. To limit FTDT risks, trustees should be aware of all FTE or IEEs made and their family group and keep copies of all elections.
The final checklist item is to maintain clear and accurate records.
Poor record keeping is the most common cause of issues related to trusts. Trustees need to understand that they’re personally liable for the debts of the trusts they administer. Keeping complete and accurate records can prevent unforeseen tax liabilities from falling upon the trustee.
