Trust Income Distribution – Year end planning

Trust Income Distribution – Year end planning

It’s nearing that time of year again and we would like to remind you that if you have a family trust, please make sure all income distribution decisions and resolutions are done by 30 June 2018 to ensure that it is compliant with the trust rules. 

We would also like to draw your attention to key 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 allows you to stream capital gains and franked dividend income, and any other categories of income 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 making the decision to distribute the income should be made in writing prior to or by 30 June. However some trust deeds may require the decision to be made prior to the end of the income year (i.e. decision to be made by 28 or 29 June) and if this is the case, then this condition must be met in order 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 make the decision 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 decision. 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 section of the law 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 are distributions to foreign or non-resident beneficiaries.

Section 100A generally does not apply to income distributed to minors (children under the age of 18). However, a potential problem arises when trust income is distributed to adult children and instead of paying the amount of trust income to the adult children, “mum and dad” get the benefit of the distribution through having the trustee loaning the money to themselves on an interest-free term. This arrangement would generally constitute a Reimbursement Arrangement if it was intended that the beneficiary who was made presently entitled to the trust income pays a lower amount of tax than would have been payable by the person who actually 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 would like 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 – this article has been produced by Kreston Stanley Williamson as a service to 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 contained in this article, it is imperative you seek specific advice relating to your particular circumstances. Liability limited by a scheme approved under professional standards legislation.

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