We trust you’re enjoying our tax planning series and are taking away some ideas that you can implement to provide you with improved financial outcomes. Remember, we love doing tax planning for our clients so please take up our offers during this series.
A warning about today’s topic – we get a bit more technical than we’d like and probably more than our readers would like. However, we have consciously decided to take this path as we know that Trust Resolutions prior to 30 June each year are a relatively new concept that is enforced by the ATO. One benefit provided by discretionary trusts is the distribution of income to various beneficiaries – get it right and the tax savings are very significant, but get it wrong and beware the outcomes.
If you are a client and have an existing trust most likely you’ll have already received some correspondence from our office in relation to this process of resolution. If you haven’t please contact Angela Corby on 03 9744 7144 who will be able to help.
For those readers who aren’t clients or don’t have trusts you may find this Question & Answer document interesting as it speaks to the nuances that go with Discretionary Trusts. This gives an indication of the thought processes that trustees should undertake to get the most from a trust when looking at tax efficiency on a year to year basis. We hope you enjoy it and would like to thank Change GPS who have helped us pull this technical document together.
Trust Distributions 2015 – before 30 June
If you are a trustee and you make beneficiaries of a trust entitled to trust income by way of a resolution, it is important you read the following information. It will help you to make sure you are correctly complying with all the necessary requirements when you make your resolutions.
Do you have a complete copy of your trust deed?
A resolution must be consistent with the terms of your trust, so make sure you have a complete copy of your trust deed, including amendments. You need to ensure that any resolution you make to distribute your trust’s income for the year is made in accordance with the terms of the trust deed.
When do you have to make your resolutions?
All trustees who make beneficiaries entitled to trust income by way of a resolution must do so by the end of an income year (30 June). This resolution will determine who is to be assessed on the trust’s taxable income.
If your trust deed requires your resolution to be made at a date before 30 June, you should comply with the requirements of the deed – for example, if the trust deed requires your resolution to be made by 28 June, then you should make your resolution by that date.
If your trust deed requires an earlier resolution, all references we make to 30 June should be read as the earlier date required by your deed.
Is there a standard format for a resolution?
No. 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 must establish, in one or more beneficiaries, a present entitlement to the trust income by 30 June.
Does a resolution have to be in writing?
Whether the resolution must be recorded in writing will depend on the terms of your trust deed. However, a written record will provide better evidence of the resolution and avoid a later dispute, for example with us or with relevant beneficiaries, as to whether any resolution was made by 30 June.
A written record will be essential if you want to effectively stream capital gains or franked distributions for tax purposes – this is because a beneficiary can only be specifically entitled to franked dividends or capital gains if this entitlement is recorded in writing in the records of the trust either:
• by 30 June for franked dividends, or
• by 31 August for capital gains.
A beneficiary cannot be made specifically entitled to a capital gain included in the income of the trust estate after 30 June if, as a result of the operation of the trust deed, another beneficiary (including a default beneficiary) was presently entitled to it.
Who can you appoint income or capital to?
Check the trust deed to ensure that the intended beneficiaries are within the class of persons who can benefit from an appointment of trust income (or of trust capital, if you intend to stream a capital gain that is not income of your trust) and not listed as excluded beneficiaries. For example, sometimes a deed will specifically exclude a beneficiary if they are the trustee of the trust.
If you make an appointment in error to someone who is not a beneficiary, the default beneficiaries (if there are any) or you as trustee, may be assessed on a corresponding part of the trust net (taxable) income.
Has the trust made a family trust election?
If so, then check whether the intended beneficiaries are within the family group of the individual specified in the election. Appointing trust income or capital to a person outside the family group will result in a tax liability to you (as trustee).
Has the trust vested (come to an end)?
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.
Is the wording of your resolution clear and unambiguous?
Check that your resolution is unambiguous and robust enough to deal with all eventualities.
A trustee resolves to distribute the trust income as follows:
A – the first $100
B – the next $100 to B
C – the balance of the income
D – the balance of the income.
The trustee may have been intending to appoint to C and D 50% of the income remaining after the specific appointments to A and B. But on one reading, all of that income was appointed to C, so that there is nothing which can be distributed to D.
A trustee simply resolves to distribute all of the trading income to a beneficiary. But the trustee, in carrying on a business, has derived some interest income – this interest income would not be dealt with by the resolution. Depending on the wording of the particular trust deed, the result would be that some of the net (taxable) income of the trust would be assessed to the trustee or default beneficiaries.
Are conditions on the entitlements fully effective by 30 June?
A resolution would not be effective if it states that entitlements of beneficiaries would change in the event of a future adjustment by the Commissioner of Taxation. This is because such a resolution would not have been effective to create an entitlement before 30 June.
How should you calculate the income of the trust?
Make sure that you understand how the income of your trust is calculated and that your resolution reflects this definition – for example, if the income of your trust is defined to be equal to its net (or taxable) income, your resolution should not distribute accounting income.
If your deed equates the trust’s income with its net (or taxable) income, you should note the Commissioner’s view set out in Draft Taxation Ruling TR 2012/D1External Link that income cannot generally include notional amounts such as franking credits.
Income of the trust needs to be reported on the trust tax return, along with each beneficiary’s share of income of the trust. This information is needed to work out each beneficiary’s share of the trust’s net (taxable) income.
Are you ‘streaming’ capital gains or franked distributions?
If you are ‘streaming’ capital gains or franked distributions (making particular beneficiaries entitled to them), firstly check that you are not prevented from doing so under the terms of the deed. Then check that you have complied with the relevant legislative requirements relating to the creation and recording of these entitlements.
For example, in a trust where income is equated with net 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 from 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 the tax law allows until 31 August to record the specific entitlements relating to capital gains, such entitlements cannot be created or carried 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 besides capital gains and franked distributions 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 the tax law, each beneficiary is taxed on a proportionate share of each component of net income and cannot be treated as having a share of net income that consists of one category of income.
It is only under separate provisions, such as those dealing with capital gains and franked dividends, where a beneficiary may be taken to have derived income of a particular character. The tax effectiveness of streaming particular types of income to particular beneficiaries will depend on the effect of relevant tax law provisions
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To participate in a tax planning session specific to your needs and requirements please contact our office on 03 9744 7144 to book a session with one of our tax specialists.