As the year draws to a close, we want to emphasise the importance of engaging qualified accountants in Sydney for your family’s trust. To ensure compliance with trust regulations, we urge you to complete all income distribution decisions and resolutions by 30 June 2018. By seeking the expertise of professional accountants in Sydney, you can confidently navigate the intricate trust rules and ensure proper compliance.
We would also like to draw your attention to crucial trust issues that have been recently looked at by the ATO, and below are a summary of these issues:
1. Income Resolution Income – the new trust rules now only allow you to stream capital gains and franked dividend income, and any other income categories will form part of the so-called residual basket for distribution. The decision by the trustee to distribute income to a beneficiary can take the form of a resolution or minute (or other form of documentation, depending on the trust deed). Generally, the timing of deciding to distribute the income should be made in writing before or by 30 June. However, some trust deeds may require the decision to be made before the end of the income year (i.e. the decision to be made by 28 or 29 June), and if this is the case, then this condition must be met for the income distribution to be effective for that income year.
The income distribution timing is very restrictive and is often very difficult for a trustee to decide as they do not know the income earned by the trust until a few months after the end of the income year (i.e. where the trust has managed investments funds that do not finalise their tax and income reporting until 3-4 months later). For this reason, we encourage and recommend that trustees try to avoid making a distribution decision using set dollar amounts and apply the appropriate income percentages to the relevant beneficiaries instead. Here is a checklist from the ATO that sets out the points to be considered as a minimum requirement for income distribution decisions. ATO Checklist.
2. Application of Section 100A (Reimbursement Arrangement) – the ATO is using this relevant section of the law to review the effectiveness of income distribution to beneficiaries and will seek to undo the distribution if the trustee cannot establish that the financial benefit (money) has been paid or passed to the relevant beneficiary. This law section has an open-ended period for amendments so the ATO can go back and amend ineffective income distributions to a beneficiary at any time. An example of this is distributions to foreign or non-resident beneficiaries.
Section 100A generally does not apply to income distributed to minors (children under 18). However, a potential problem arises when trust income is distributed to adult children. Instead of paying the trust income to the adult children, “mum and dad” benefit from the distribution by having the trustee loan the money to themselves on an interest-free term. This arrangement would generally constitute a Reimbursement Arrangement if it were intended that the beneficiary who was presently entitled to the trust income pays a lower amount of tax than would have been payable by the person who enjoyed the economic benefits of that income.
Where trust income is distributed to adult children, we recommend that the trustee maintain proper records to demonstrate the payments of expenses and costs of the relevant children (i.e. their school or living costs etc.). Where possible, the money should be coming out of the trust’s bank account to provide easier tracking of payments to the individuals.
Should you have any questions or want to know more about the above issues relating to trust distribution, please do not hesitate to contact us.
Kreston Stanley Williamson Team
*Correct as of June 2018
Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.