With less than a month to go before the end of the financial year (EOFY) rolls around, some important tasks need to be completed for family trusts.
Discretionary trusts (often called family trusts) are the most common trust used in Australia and are generally created to hold and protect family or business assets.
Trustees of family trusts are able to distribute trust income or capital to any beneficiaries they choose.
That means beneficiaries have no entitlement to receive payments in any one year, so one of the key tasks before EOFY is making the necessary trustee resolutions for the current income year.
To ensure the trust’s discretionary beneficiaries are presently entitled to trust income, effective resolutions must be made by 30 June, or the date noted in the trust deed. This is particularly important if you wish to make beneficiaries specifically entitled to franked dividends and capital gains this year.
Making effective resolutions
Trustee resolutions don’t need to specify a dollar amount for each distribution (unless required by the trust deed), but they must provide a clear way of calculating what each beneficiary will receive.i
Failing to follow the requirements of the trust deed, or failing to appoint income by 30 June may result in beneficiaries – or you as the trustee – being assessed on the relevant share of the trust’s net (taxable) income.
Aside from checking the trust has not vested, as a trustee you also need to ensure the resolutions are unambiguous and preferably in writing.
Trustees also need to check their trust deed (including any amendments), to ensure the intended beneficiaries are permitted to receive trust income or capital and are not excluded from being beneficiaries. Effective resolutions require trustees to have complied with any requirements in the trust deed covering how to validly appoint or distribute trust income to beneficiaries.ii
Putting it in writing
Written records of annual resolutions are essential if you wish to effectively stream capital gains or franked distributions to beneficiaries for tax purposes.iii
If a resolution deals with franked distributions from the trust, trustees are required to put these in writing indicating the beneficiaries specifically entitled to the franked distribution.
When it comes to capital gains, written resolutions are also required and these need to be made by 31 August of the following income year to ensure discretionary beneficiaries are specifically entitled to the capital gain.
However, if some or all of a capital gain forms part of the income of the trust estate, the resolutions need to be made by 30 June, because any capital gain forming part of the trust income cannot be specifically dealt with after a beneficiary has already been made presently entitled to it.
Check family trust elections
It’s also vital to check the elections your family trust currently has in place to avoid incurring family trust distribution tax (FTDT).iv
If a trustee distributes income or capital to an entity other than the individuals specified in the family trust election, FTDT is payable at the top marginal tax rate (plus the Medicare levy) on the distributions.
The ATO encourages trustees to regularly review their trust’s in-force elections. It recommends checking annually whether current elections can or should be revoked, if the specified individuals remain suitable, and the timeframes for varying or revoking elections.
If any new entitled beneficiaries have been added to the trust during the income year, check you are holding their tax file number.
Prepare for new reporting requirements
Trustees also need to ensure they are prepared for the administration changes from 1 July 2024. These changes are part of the Modernisation of Trust Administration Systems (MTAS) project and affect return lodgements for the 2023-24 and later income years.v
The MTAS project was announced in the 2022-23 Federal Budget with the aim of streamlining taxpayer lodgements, improving the accuracy of income tax return information from trusts, and providing better information for ATO compliance activities. The new system is also designed to encourage the 30,000 trusts still lodging paper returns to move to electronic lodgement.
From 1 July 2024, trustees are required to complete four new capital gains tax (CGT) labels in the statement of distribution section of their trust’s return. These labels are designed to help notify beneficiaries of their entitlement to trust income and assist with the calculation of CGT amounts in their tax returns.
Trustees are also required to prepare a new trust income schedule for all beneficiaries receiving income from the trust. Beneficiaries will need to lodge this trust income schedule with their annual tax return.
If you would like more information about EOFY requirements for your family trust, call our office today.
The ATO is watching
The ATO’s Trust Tax Avoidance Taskforce has released a long list of trust activities that will get its attention.vi
Some of the activities include:
- Circular trust distributions
- Differences between distributable and net income
- Distributions of franked dividends
- Distributions to complying super funds
- Distributions to tax-preferred beneficiaries
- Family trust distributions tax
- Income re-characterisation arrangements
- Loss trust moved into group
- Non-lodgement of trust and beneficiary returns
- Non-residents’ capital gains
- Potential reimbursement agreements
- Unitisation arrangements
- Value extraction and corpus distributions
It’s worth remembering there can be significant tax implications if you don’t follow the rules and comply with your legal obligations as a trustee.
i Trustee resolutions | Australian Taxation Office (ato.gov.au)
ii Trustee resolutions | Australian Taxation Office (ato.gov.au)
iii Capital gains | Australian Taxation Office (ato.gov.au)
iv Family trusts – concessions | Australian Taxation Office (ato.gov.au)
v Modernising trust administration systems | Australian Taxation Office (ato.gov.au)
vi Trust activities that attract our attention | Australian Taxation Office (ato.gov.au)
