There are many things to look out for during tax time, but one thing that is mentioned far too little is that of tax considerations regarding trusts. In this article, we will delve into trusts and how to ensure you meet the ATO’s compliance requirements.
It is important to note that as a trustee, you can be taxed at a rate of 47%. To avoid this trustee assessment rate, you must ensure that you make beneficiaries entitled to all of the income of the trust before 30 June each year. You should consider using percentages to reduce the extent that the ATO adjustments could result in tax at the top marginal tax rate.
It is also vital to review your trust deed before you make distributions to ensure that the deed is appropriate for distributions and future income years. Further, reviewing your deed will ensure that proposed distributions are made to eligible beneficiaries and that the requirements for valid distributions will be satisfied.
The meaning of income also needs to be understood for the purposes of the trust estate. The taxable income of a trust is allocated to beneficiaries based on their proportionate entitlement to income of the trust for trust purposes. Therefore, it is vital to review the trust deed to determine how income is defined; ensuring resolutions are effective in distributing all trust income and thereby avoiding trustee assessment.
You should also ensure that trustee resolutions are made before the year-end. In preparing resolutions, you may not be required to have full documentation of the trustee resolution by 30 June unless required by the trust deed. Despite this, the ATO will expect evidence of decisions made by the trustee through either rough notes or documents prepared i.e. spreadsheets, budgets and mapping documents.
Division 7A is another tax trap to be aware of. Ensure that you have considered it when distributing income to a corporate beneficiary and the amount thereof remains unpaid present entitlement (UPE). Where a UPE exists, the UPE may result in a deemed dividend if not placed on complying Division 7A terms or Investment Agreement terms.
Further, what deductions are allowable in relation to trusts is also something to be aware of. Where a beneficiary of a discretionary trust borrows money (at interest) and then on-lends money (interest-free) to the discretionary trust, the ATO may take the view that the interest expenditure may not be deductible even if the beneficiary will receive trust distributions. Instead, you should consider charging interest on such loans for 30 June. Additionally, superannuation contributions for a director of a corporate trustee of a trust will generally only be deductible if the director is a common-law employee of the trust engaged in producing the assessable income of the trust. One may need to consider whether such contributions will be deductible. You also should review your Family Trust Election (FTE) requirements for the year to ensure that deductions for bad debts and losses and the ability to flow-through franking credits are protected.
If you require further assistance with respect to the above or would like to know more, you are welcome to contact our team of experienced lawyers and accountants by submitting an online enquiry form or call us on 1300 QUINNS (1300 784 667) or on +61 2 9223 9166 to arrange conference or appointment.