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ATO guidance on managing trust distributions

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The taxation of trusts continues to be an area of scrutiny for the ATO.

The ATO has released a webpage titled ‘Trust distributions done right’ that provides guidance to practitioners on how to prepare for year-end trust distributions. The webpage (QC 101752) can be found here.

Clearly, the ATO is concerned with trustees and practitioners properly managing their annual distributions.

What the webpage contains

The ATO recommends that practitioners should consider the following:

  • Review your clients’ trust deeds and any amendments to ensure trustees are making decisions consistent with the terms of their deed. Check that the trust has not vested, as this may impact distribution decisions.
  • Determine who the intended beneficiaries are and their entitlement to income and capital under the trust deed. If the trustee has made a family trust election or interposed entity election, this may have a tax impact on distribution decisions.
  • Support your clients to notify beneficiaries of their entitlements to allow beneficiaries to correctly report distributions in their tax returns, preventing trust income from being omitted.
  • Requirements under the deed governing the making of trustee resolutions, including the need to have the resolution in writing and the timing of when it is required to be made. Resolutions need to be made by the end of the income year.
  • Whether the trustee has capital gains or franked distributions they would like to stream to beneficiaries. This should include confirming the trust deed does not prevent this and that trustees have complied with the legislative requirements relating to streaming these amounts.

The webpage also states that ‘Our compliance activities often identify mistakes made by trustees that are the result of not following trust deeds or not checking family trust elections’.

ATO checklist for trust distributions

In May 2023, the ATO also released a checklist for trustees who wish to make beneficiaries presently entitled to trust income by way of making resolutions. The checklist (QC25912) can be found here (Checklist).

This checklist poses the following questions to assist trustees:

  • Do you have a complete copy of the trust deed? (Click here for our lost deed service)
  • Who can you appoint income or capital to?
  • Has the trust vested?
  • Is there a family trust election in force for the trust?
  • When do you have to make resolutions?
  • Is there a standard format for a resolution?
  • Does a resolution have to be in writing?
  • Is the wording of your resolution clear and unambiguous?
  • Is the entitlement vested?
  • Can the entitlement be taken away?
  • Variation of income resolutions
  • How should you calculate and report the income of the trust?
  • Are you ‘streaming’ capital gains or franked distributions? (Click here for our trust streaming variation service)
  • Are you seeking to ‘stream’ other types of income?
  • Will records created after 30 June be accepted as evidence of the making of the resolution by that date?
  • Do you have to prepare the trust accounts by 30 June to make beneficiaries presently entitled to trust income?
  • What happens if you make a resolution after 30 June?
  • Have all entitled beneficiaries quoted their tax file number (TFN) to you?

The issues raised in this checklist show that correctly managing tax aspects of trusts relies on a good understanding of various trust law principles that can apply.

Interestingly, the Checklist contains the following comments and warning:

The tax outcome in each case will depend on the legal effect of the particular resolutions. This is a matter of trust law, not tax law, and the Commissioner is not able to conclusively determine this.

Where there are a range of possible interpretations, we will consider raising alternative assessments where the correctness of each assessment depends upon the proper legal effect of the resolutions. This may include assessments to beneficiaries (including default beneficiaries) as well as an assessment to the trustee under section 99A of the Income Tax Assessment Act 1936 [ITAA 1936] on the highest amount that they could be assessed on under any of the alternative views.

Alternative assessments are typically used by the Commissioner in situations where he considers there is genuine doubt about which assessment is appropriate to ensure that assessments are made within the relevant legislative timeframes required. Once the taxpayer’s ‘final’ liability has been determined, the relevant assessments will be amended by the Commissioner. Ultimately however, the Commissioner would not collect more tax than the final ‘correct’ liability.

More information on the use and application of alternative assessments by the Commissioner can be found in PS LA 2006/7.

Records after 30 June may support resolutions made before 30 June

The ATO guidance also confirms that if a resolution is validly made by 30 June, the ATO will accept records created after 30 June as evidence of the making of a resolution by that date. (Typically distribution resolutions need to be made before midnight on 30 June or prior to the relevant default distribution date/time specified in the deed, if earlier.)

While examples are provided of the types of records that would be accepted by the ATO, it seems clear that some written evidence would be required, such as a handwritten note, or family group ‘map’ showing relevant distributions as resolved.

The ATO therefore accept trustee resolutions that confirm a prior resolution that is not reflected in formal trustee resolutions. Such resolutions should be drafted as confirmatory and dated when completed. Note that backdating documents is subject to serious penalties.

Conclusions

The ATO’s additional guidance on trust distributions shows this is an area that the ATO are likely to be keeping a closer check on. Trustees should ensure they ensure they are considering the points raised by the ATO above as, without careful administration and record keeping, trustees may become liable for additional taxes and penalties.

Trustees and their advisers should ensure they are familiar with and have the relevant provisions in their trust deeds and ensure their distribution resolutions are valid and effective.

Expert advice should be obtained if there is any doubt. Naturally, DBA Lawyers would be pleased to assist.

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2001 (Cth).

Note: DBA Lawyers presents monthly online SMSF training. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.

For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.

By Shaun Backhaus, Senior Associate ([email protected]) and Daniel Butler, Director ([email protected]), DBA Lawyers.

DBA LAWYERS

13 May 2024

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