Overview
The taxation and administration of trusts continues to be an area of development. The Commissioner’s application of long forgotten tax provisions (in form of s 100A of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936)), and recent court cases extending the obligations of trustees to consider beneficiaries (in form of Re Owies Family Trust [2020] VSC 716) has made managing a family trust considerably more complex.
The ATO has released a checklist for trustees who wish to make beneficiaries presently entitled to trust income by way of making resolutions. The checklist can be found here.
The ATO has said on its website ‘You need to ensure resolutions meet the requirements explained below’ and so it is important that any trustee is aware of what the ATO expects before making resolutions.
What the checklist contains
The checklist poses the following questions:
- 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.
Alternative assessments
Interestingly, the webpage contains the following:
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 ITAA 1936 on the highest amount that they could be assessed on under any of the alternative views.
Alternative assessments are 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 legislative timeframes required. Once the ‘final’ liability has been determined with the Commissioner, by way of agreement or relevant litigation processes, the relevant assessments will be amended. 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 checklist 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.
Trust deeds need to be checked and in order
Most tax effective strategies including tax effective distributions require a quality and up to date trust deed. However, many trust deeds that we review are considerably out of date and do not include express streaming provisions. Naturally, we can review and amend trust deeds, if requested.
The design of trust deeds differ markedly from supplier to supplier and some trust deeds have automatic default distributions of net income (or distributable income) typically to the primary beneficiaries and some automatically accumulate net income resulting in a trustee assessment at a 47% tax rate (including the Medicare levy).
We also regularly come across clients with one or more missing documents in their trust deed history. We have recently prepared a number of articles on this topic as there is now considerable development in case law that provides a number of methods to minimise the risk relating to overcoming missing trust documents. We can also review prior trust deeds and advise on options to ‘rectify’ lost deeds, if requested.
Managing tax considerations
There has been increased complexity in managing the tax considerations that relate to deciding on making appropriate 30 June distribution resolutions, including:
- Ensuring franked dividends and associated franking credits are streamed to the relevant beneficiaries.
- Ensuring capital gains are streamed or made to the relevant beneficiaries. This needs careful consideration as the net capital gain is included net income for tax purposes but if the deed does not define ‘income’ to include an assessable capital gain a corpus distribution is also be required as capital is not income for trust law purposes.
- Whether a distribution is allocated in proportions or set dollar amounts including any remaining balance being directed to a corporate or other beneficiary.
- Making sure the trustee has given due consideration to the needs of each eligible beneficiary. There has been a sizeable increase in legal actions being made against trustees in recent years where beneficiaries claim their interests have not been appropriately considered (see the first related article below).
- Making sure there are no foreign persons benefiting where foreign person exclusion provisions apply for duty and land tax purposes under the relevant state or territory. (Click here for our foreign person exclusion service)
- Making sure beneficiaries are notified of their entitlements as needed there are no reimbursement agreement risks under s 100A of the ITAA 1936.
- Checking that beneficiaries fall within the ‘family group’ where any family trust election has been made having regard to the test individual in that election (or any relevant interposed entity election where the trust proposes to distribute to another family company or family trust.
- Managing any division 7A and unpaid present entitlement (UPE) risks.
Conclusions
The ATO checklist provides some guidance for trustees and their advisers as to what the ATO expects by way of distribution resolutions.
Distribution resolutions must be clear and unambiguous to ensure that unexpected tax liabilities do not arise.
Trustees should ensure they ensure they are familiar and have the relevant provisions in their trust deed to ensure their distribution resolutions will be tax effective and manage the numerous tax and legal issues that relate to making tax effective distributions. Ongoing management of trusts is also required given the increased complexity of managing the above issues, especially s 100A, division 7A and UPEs.
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.
Related information
- Is your discretionary trust still discretionary? Case law developments on trustee duties
- Discretionary trusts – variations and issues
- Options to minimise risk if you lose a trust deed
- A 1976 deed can’t be found … trust fails as a result!
- Sutton v NRS(J) Pty Ltd [2020] NSWSC 826: Lessons for managing lost trust deeds
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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
27 June 2023
