Important reminders – Trust distributions
The Template We Sent
The template may mention of a Clause and any relevant schedules you may have to specifically mention. These are highlighted in the template by a red colour, this is where you check your Trusts Deed to enter the correct clause in regards to decisions being made and income being distributed. You may do a similar arrangement to last year, please feel free to get last years template and change the data and edit it accordingly. As there are a wide variety of trust deeds with different requirements for trustee resolutions, we cannot provide a standard format. The important thing is that your resolution makes one or more beneficiaries presently entitled to the trust income by 30 June.
Do you have a complete copy of the trust deed?
Make sure you have a complete copy of the trust deed, including any amendments. You need to be sure that any resolution you make to distribute the trust’s income or capital is consistent with the terms of the deed, this may be set out the template we sent.
Before 30 June you must ensure the following are taken care of:
- Trustee resolutions need to be in place to be able to distribute trust income for the current financial year to beneficiaries (at the latest).
- Ensure Tax File Numbers have been received from beneficiaries (excluding minors, non-residents and tax-exempt entities) before appointing income to them.
Timing of resolutions
Trustees (or directors of a trustee company) need to consider and decide on the distributions they plan to make by 30 June each year, at the latest (the trust deed may actually require this to be done earlier). Decisions made by the trustees should be documented in writing, preferably by 30 June each year.
If valid resolutions are not in place by 30 June each year, the risk is that the taxable income of the trust will be assessed in the hands of a default beneficiary (if the trust deed provides for this) or the trustee (in which case the highest marginal rate of tax would normally apply).
Low income tax offset and minors reminder
The low income offset has not been available to minors who only receive ‘unearned’ income (e.g. distributions from a discretionary trust) since 2013. Minors who only receive ‘unearned’ income will be subject to penalty rates of tax on income that exceeds $416 – this may include the debt tax.
The low income offset can potentially still apply to minors who receive distributions from a deceased estate or testamentary trust.
Streaming of franked dividends and capital gains
Trustees are only be able to stream franked dividends (and the franking credits that are attached to those dividends) to a particular beneficiary for tax purposes if the beneficiary’s entitlement to the franked dividends is recorded in writing by 30 June 2014. For streaming of capital gains to be effective for tax purposes, the beneficiary’s entitlement must be recorded in writing by 30 June if the capital gains form part of trust income for the year or 31 August if the capital gains do not form part of trust income.
We can assist you with this process if you do wish to stream franked dividends or capital gains to specific beneficiaries.
Tax exempt entities
If a trustee resolves to distribute income to a tax exempt entity, the trustee will be assessed on that income at the top marginal tax rate unless:
- The trustee actually pays the entire distribution within 2 months of the end of the income year; or
- The trustee notifies the entity in writing of its entitlement within 2 months of the end of the income year.
Also, anti-avoidance rules tax the trustee on a portion of the income distributed to a tax-exempt entity where there is a mismatch between the net financial benefit to be received by the entity and the tax treatment of the distribution.
The trustee of a ‘closely held trust’, such as a discretionary trust, must withhold tax from distributions to beneficiaries where they have not provided their TFN to the trustee. The rules apply when distributions are made by a closely held trust to most types of beneficiary except where:
- Beneficiaries under a legal disability (e.g., minors);
- Beneficiaries that are non-residents for tax purposes;
- Beneficiaries that are exempt entities (e.g., deductible gift recipients etc.).
When a beneficiary provides their TFN and other relevant details to a trust, the trustee must lodge a TFN report for that quarter with the ATO. TFN reports are due by the last day of the month following the end of the quarter. A beneficiary’s TFN only needs to be reported to the ATO once. It is not necessary to lodge a TFN report if there are no new TFNs to report for a quarter.
If the beneficiary has not provided their TFN to the trustee by the time a distribution is made, the trustee is required to withhold tax from the distribution at the highest marginal rate plus Medicare levy.
Has the trust vested?
Check the trust deed to ensure that the trust has not yet vested. If it has, then entitlements to income will already have vested in those beneficiaries entitled to the trust fund on the vesting date and attempted appointments of income or capital that are inconsistent with those entitlements will be ineffective.
Are you ‘streaming’ capital gains or franked distributions?
If you are ‘streaming’ capital gains or franked distributions (seeking for their character to be retained as capital gains or franked distributions in the hands of beneficiaries), check that:
- you are not prevented from doing so under the terms of the deed
- you have complied with the relevant legislative requirements relating to the creation and recording of these entitlements.
For example, if a trustee wants to stream a capital gain to a particular beneficiary so that the gain is assessed only to that beneficiary, the beneficiary must be entitled to all of the financial benefits referable to the capital gain. In a trust where income is equated with the trust’s net (taxable) income, a resolution distributing that part of the income attributable to a discount gain will only create an entitlement to 50% of the financial benefits that arise from the capital gain – that is, the discount component of the capital gain being non-assessable will not form part of the income of the trust.
To create an entitlement to all of the financial benefits referable to the capital gain, the trustee would also need to distribute that part of the trust capital attributable to the discount component of the gain.
While tax law allows until 31 August to record the specific entitlements relating to capital gains, such entitlements cannot be created over any amount that has already been dealt with – for example, any capital gains forming part of trust income that was already dealt with by 30 June.
Are you seeking to ‘stream’ other types of income?
The tax attributes of other types of income cannot be separately streamed to different beneficiaries in the way that capital gains and franked distributions may be streamed. Under the general trust-assessing provisions in tax law, each beneficiary is taxed on a proportionate share of each component of the trust’s net (taxable) income and cannot be treated as having a share of net income that consists of one category of income (for example, foreign income).