As we approach the end of the financial year all trustees should be considering their trust distribution minutes.
These minutes document the trustee’s decision in relation to the distribution of income for the financial year.
The timing of these minutes is determined by the rules in their trust deed, but many will require the decision to be made prior to the end of the financial year. Where the trustee fails to make a decision on the distribution of trust income for the financial year by the required date then the trust deed can require the default beneficiaries or the trustee to be assessed on the income. Where the trustee is assessed, that will be at the top marginal rate of tax.
In determining the trust distribution minutes the following is key:
- Have a copy of the trust deed, including any amendments.
- Ensure the distribution of the trust’s income is in line with the trust deed rules.
- If streaming capital gains or franked distributions check the trust deed does not prevent this.
- Identify from the trust deed who can and cannot be a beneficiary.
- Check if a Family Trust Election (FTE) has been made to ensure that the beneficiaries who will receive a distribution are in the family group.
The ATO does not define a standard format for the trust distribution minutes or what is required to be included, as this will be determined by the requirements of the trust deed. The deed will also outline whether the minutes are required to be in writing. However, a written record is recommended to avoid any later disputes.
Trustees should also ensure they have the Tax File numbers (TFNs) for beneficiaries otherwise the TFN withholding tax rules apply. These require the trustee to withhold tax from the distribution, pay this to the ATO and lodge an annual PAYG withholding report to the ATO detailing the amounts withheld.
Recent ATO guidance on a number of trust tax law matters should also be considered as part of the year end planning. These include:
- The ATO’s recently released draft guidance on the application of the integrity rule in section 100A of the tax legislation. Section 100A is not new, and broadly aims to ensure the real benefit of distributions do not end up with someone other than the beneficiary. The ATO guidance outlines the ATO views on what arrangements it considers are acceptable and what are not. Further detail can be found here: https://www.ato.gov.au/General/Trusts/In-detail/Trust-entitlements—draft-guidance/
- The ATO has also released a draft determination dealing with unpaid distributions owed by trusts to corporate beneficiaries. The ATO guidance looks at when an unpaid present entitlement to trust income will start being treated as a loan and how this can fall within the scope of another integrity provision in the tax law, Division 7A. Further guidance can be found here: https://www.ato.gov.au/law/view/document?DocID=DXT/TD2022D1/NAT/ATO/00001
- Finally, the ATO has released a Practical Compliance Guideline on professional firms (e.g. lawyers, doctors, accountants and other professionals) and the allocation of profits. The ATO PCG 2021/4 sets out the ATO’s guidance in this area and this should be considered if a professional firm is operated through a trust structure. Further information can be found here: https://www.ato.gov.au/business/income-and-deductions-for-business/in-detail/professional-firms/assessing-the-risk–allocation-of-profits-within-professional-firms/
There is a lot for trustees to consider as we approach the end of the financial year to ensure compliance with the ATO requirements and their trust deed rules.
If you would like further information or have any queries please reach out to the BridgePoint Group team.