In addition to tax issues, there are several practical issues that need to be considered when dealing with trusts.
Unpaid distributions are an asset
It is important to recognise that unpaid distributions are an asset in the hands of the beneficiary. While circumstances remain amicable, these unpaid distributions may not be problematic (aside from the Division 7A issues identified above).
However, if circumstances change the beneficiary (or their representative) could call for payment of the unpaid distribution, potentially placing the trustee in cashflow difficulties if the funds have been invested elsewhere. Common examples of such circumstances include:
- Family disputes;
- A beneficiary divorcing from their spouse;
- A beneficiary being declared bankrupt; and
- The death of a beneficiary.
Regard should be had for the potential for these issues to arise, in addition to the usual tax considerations, when a trustee is deciding where to distribute its income for a year. For example, it may be unwise for a trustee to distribute income to an ‘at-risk’ individual.
Pensions and Centrelink
A trustee or beneficiary of a trust may have problems when seeking to obtain a pension or benefit from Centrelink. This is because, in some cases, Centrelink may attempt to include the income (or assets) of a trust in the assessment of an individual’s financial position.
If you have a query regarding the above or need further information, please contact one of our tax accountants on (02) 9223 9166 to discuss. Alternatively, you can submit an online enquiry form.