A reminder that 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.
Things to Know
If no beneficiary is presently entitled to the trust income at 30 June, the trustee will be assessed on the trust’s taxable income at the highest marginal rate plus the Medicare levy.
Whether the resolution must be recorded in writing will depend on the terms of the trust deed. However, a written record will provide better evidence of the resolution and avoid a later dispute as to whether any resolution was made by 30 June. There is no standard format for a resolution as there are a wide variety of trust deeds with different requirements for trustee resolutions. The important thing is that the resolution must establish, in one or more beneficiaries, a present entitlement to the trust income by 30 June.
On the other hand, 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:
o by 30 June for franked dividends, or
o by 31 August for capital gains.
It is important to remember that from the 2012 income year, trustees and practitioners are no longer able to rely on the administrative concession previously provided by the ATO to defer making a trust resolution within the two months of the end of an income year.
As a normal practice, the ATO will issue the assessment based on their understanding of the trust deed, resolutions, financial accounts and other documentation relevant to the income year under review. If the Court orders the rectification of a trust deed or resolution, then it will be viewed as part of the objection process to the assessments.
A final reminder regarding two specific anti-avoidance rules that were introduced in 2011 to address the inappropriate use of exempt entities to shelter the taxable income of a trust. The pay or notify rule generally applies if an exempt beneficiary has not been notified of or paid their present entitlement to income of the trust estate within two months of the end of the income year. In this circumstance, they are treated as not being – and never having been – presently entitled to that income.
The second rule, the benchmark percentage rule applies if an exempt entity’s entitlement to the income of the trust estate (ignoring any franked distributions and capital gains any entity is specifically entitled to), expressed as a percentage, exceeds a benchmark percentage.
Under both rules, the trustee is assessed on the share of the trust’s taxable income that corresponds to the income the exempt beneficiary is taken as not being entitled to.