If you have a family trust that earns taxable income, there are several tax compliance matters that you must fulfil.
Distributions to beneficiaries other than your spouse
In 2022, the ATO issued Tax Ruling 2022/4: Income tax: section 100A reimbursement agreements. It relates to a section of tax law (S. 100A) that has always existed, but the ATO had never previously enforced it.
It is our view that the ATO is trying to make it more difficult for trustees to minimise tax by distributing taxable income to multiple taxpayers to benefit from their lower marginal tax rates. The government has been talking about potentially changing how discretionary trusts are taxed for the past two to three decades, but it’s never progressed. Probably because changing how trusts are taxed would go against the legal nature of trusts which is intrenched in common law principals. Perhaps the ATO sees using S. 100A as a more expedient method of raising more tax revenue without needing to change how trusts are taxed.
To save you the time (and boredom) of reading the tax ruling (TR 2022/4), essentially, if you distribute monies to any adult that is not your spouse, the monies must be physically distributed to the beneficiary, and the beneficiary must not give the money back to you. If you pay for expenses on behalf of a beneficiary (e.g., such as university fees for your child who is a beneficiary), that expense may be offset against the distribution.
Tip: If you plan to distribute money to adults other than your spouse (common examples are adult children or parents), please speak to us so that we can ensure you comply with the ATO’s guidance.
Trustee minutes completed prior to 30 June
Trustees must prepare resolutions setting out how it will distribute the income and capital gains of the trust. These resolutions must be in writing and completed prior to 30 June. It can be challenging to complete these resolutions, as we may not be able to ascertain a trust’s tax position before the financial year has ended, especially if it will receive dividends from a trading company. It is important that the wording used in trustee resolutions are drafted correctly i.e., in line with the trust deed.
Please contact us to ensure your trustee minutes are drafted correctly and before 30 June.
Notification to beneficiaries
If a beneficiary becomes presently entitled to the income or capital of the trust, you must notify them in writing within 2 months of them becoming presently entitled. Most trustees complete these distribution resolutions towards the end of June therefore most beneficiaries must receive the distribution notification by the end of August. This notification can be made by email simply stipulating the amount of the distribution.
It is very clear to us that all these tax compliance rules are in place to discourage trustees from distributing money on paper (to save tax) but never actually physically making the distributions.
Whilst these rules do increase compliance obligations, we continue to believe trusts are worthwhile for many clients and we are ready to help you navigate these, and any new obligations.