Shaun Backhaus, special counsel for DBA Lawyers, said the Australian Taxation Office has released a checklist designed to assist with this process.
“The checklist provides recommendations to help avoid basic trust errors and includes information on understanding how income is defined for the trust estate; identifying the trust’s beneficiaries and any family trust elections or interposed entity elections, and the need to maintain clear and accurate records,” Backhaus said.
He continued that the ATO also highlights the importance of trustees being familiar with the trust deed, understanding how income is defined and ensuring the income of the trust estate is accurately determined for each financial year.
“The Draft TR 2012/D1 explains there is no set meaning of the phrase ‘income of the trust estate’, referred to in Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936) and related provisions,” he said.
“The meaning will primarily depend on the terms of the trust and the statutory context of Division 6, where ‘income’ must be firstly measured in respect of distinct income years; a product of the trust estate; and an amount in respect of which a beneficiary can be presently entitled.
“Understanding of how the deed defines ‘income’ is crucial. For example, a net capital gain is included as net income for tax purposes, but if the deed does not define ‘income’ to include, among other things, capital receipts and capital gains, differences between tax and trust outcomes may arise.”
Identifying the trust’s beneficiaries is also an essential issue that trustees should understand, Backhaus added, and careful review of a trust deed is required to ensure distributions to beneficiaries are done correctly in the lead-up to the end of financial year (EOFY).
“The ATO states that the beneficiaries of the trust must be correctly identified to avoid distribution mistakes,” he said.
“The identification of beneficiaries involves making a number of considerations, including ensuring due consideration is being given to the needs of each eligible beneficiary. Additionally, trustees should also make sure that beneficiaries are notified of their entitlements to ensure there are no reimbursement agreement risks under s 100A of the ITAA 1936.
“And finally, it is also important to make sure there are no foreign persons benefiting where foreign person exclusion provisions apply for duty and land tax purposes under the legislation of the relevant state or territory.”
In regard to ensuring resolutions are valid, Backhaus said the ATO warns that if resolutions to appoint or distribute income to beneficiaries are not validly made by EOFY, trustees risk being liable for all income of the trust being taxed at marginal tax rates.
“The ATO may accept trustee resolutions prepared after 30 June that confirm a prior resolution that is not reflected in a formal document. Such resolutions should be drafted as confirmatory and dated when completed,” he said.
“Typically, distribution resolutions need to be made before midnight on 30 June or prior to any earlier date/time specified in the deed. Depending on the terms of the trust deed, there is no specific requirement for a distribution resolution to be recorded by way of a trustee resolution.”
He added that in the absence of a formal resolution made prior to 30 June, evidence of making a decision or resolution by that date is required, such as handwritten notes or a family group “map” showing relevant distribution amounts or percentages recorded that reflect what was resolved.
Backhaus said that to avoid adverse tax implications, the identification of FTEs and IEEs and the ATO explains that while family trusts can access tax concessions, any distributions made outside the “family group” may trigger family trust distribution tax at 47 per cent on distributions.
“FTDT can be side avoided by checking that beneficiaries fall within the ‘family group’ where an FTE has been made, having regard to the test individual in that election – or the test individual in any relevant IEE where the trust proposes to distribute to another partnership, company or trust,” he said.
“There are a range of special rules that apply to FTEs and IEEs, and managing these elections in some family groups can prove challenging. This appears to be a focus of the ATO’s next 5,000 taxpayer private group reviews comprising individuals, who, together with their associates and connected entities, control net wealth of more than $50 million.”
Finally, Backhaus said the need for clear and accurate records is paramount, with the ATO urging trustees to maintain complete and accurate records to avoid unforeseen tax liabilities.
“Proper record keeping is imperative to managing trust obligations,” he said.
“A prudent trustee should seek legal advice where there is any doubt about its trust deed, distribution process or resolutions, particularly where an unusual or significant distribution is involved. Also, many trust deeds are considerably out of date and may not include clear or express streaming provisions.”
