For any business owner, the end of any financial year brings with it a long list of things to do – both to finalise business’ financial and taxation obligations for the current year and to prepare for the new financial year ahead.
With less than 2 weeks to go before the end of the 2022-23 financial year, there are 2 particularly important items on the “to-do” list that we want to bring to your attention.
They are centred around Trustee Resolutions and Division 7A Implications.
If either of these matters are applicable to your individual situation, you should attend to them promptly. Failing to complete, or resolve, these matters before the 30 June deadline could mean that the necessary actions and outcomes are unable to be applied and executed as intended, potentially affecting the proposed tax benefit, as well as impacting tax compliance obligations.
You can take a look at the full list of our Best End of Financial Year Tax Tips, but for now let’s focus on what needs to happen regarding Trustee Resolutions and Division 7A Loans before 30 June 2023.
Make Trustee Resolutions before 30 June
When do you have to make resolutions?
If you make beneficiaries entitled to trust income for an income year by way of a resolution, it will only be effective for determining who is assessed on the trust’s net (taxable) income if it is made by the end of the income year (30 June).
Sometimes a trust deed will require a resolution to be made before the end of the income year. In this case you should comply with the deed. For example, if the trust deed requires your resolution to be made by 28 June, then you should make the resolution by that date.
If your trust deed requires an earlier resolution, all references below to 30 June should be read as the earlier date required by your deed.
If you are making beneficiaries specifically entitled to trust capital gains by way of appointing trust capital to them, that must be done within 2 months of the end of the income year (31 August).
Is there a standard format for a resolution?
No. As there are a wide variety of trust deeds, each with different requirements for trustee resolutions, there is not a standard format to be used for a trust resolution.
The important thing is that your resolution makes one or more beneficiaries presently entitled to the trust income by 30 June.
Does a resolution have to be in writing?
Whether the resolution must be recorded in writing will depend on the terms of your trust deed. However, a written record will provide better evidence of the resolution and potentially assist with avoiding a later dispute, for example with the ATO or with relevant beneficiaries, as to whether any resolution was made.
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:
- by 30 June for franked dividends
- by 31 August for capital gains.
A beneficiary cannot be made specifically entitled to a capital gain included in the income of the trust estate after 30 June if, as a result of the operation of the trust deed, another beneficiary (including a default beneficiary) was presently entitled to it before that date.
Declare Dividends To be Used Against Div. 7A Loans
The ATO remains vigilant in enforcing compliance when it comes to all aspects of Division 7A loans.
If you intend to address the minimum yearly repayment (MYR) for a Div. 7A loan by way of dividends, the declaration must be made by 30 June 2023.
Further to that, you must ensure that the distribution statement is issued to the shareholder/s by 31 October 2023.
If these conditions are not met, the transaction may not conform with “principal of mutual set-off”, meaning that it may not be an effective payment and therefore may not be a valid MYR.
To declare dividends for the purpose of meeting the Minimum Yearly Repayment (MYR) requirement for a Division 7A loan, the following steps must be taken:
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- Determine the minimum repayment amount: Calculate the required MYR based on the formula mentioned earlier, taking into account the opening loan balance, repayments made, new loans, and dividends declared.
- Prepare a dividend resolution: The company’s directors should convene a meeting and pass a resolution to declare the dividends. The resolution should state the amount of dividends being declared and specify that they are intended to be applied towards the Division 7A loan repayment.
- Document the dividend declaration: Prepare a formal written document, such as a dividend declaration statement, that records the details of the resolution. This document should include the company’s name, date of the declaration, amount of dividends, and the intention to apply the dividends towards the Division 7A loan repayment.
Other important actions to take in relation to Div. 7A Loans and MYR include:
- Identify any 2022-23 loans and ensure they are fully repaid or managed (with complying loan agreement) before the lodgment day of 2023 tax return.
- MYR required by 30 June 2023 for complying loans made in 2021-22 and prior income years
- For any outstanding MYR from previous years it may be possible to request an extension from the ATO under section 109RD Income Tax Assessment Act 1936.
Need Help?
Navigating, and complying with, the complex web of taxation obligations can be time consuming and overwhelming, not to mention the potential risks and penalties involved for not correctly meeting those obligations. That is why it is extremely important to seek the advice of professional tax accountants and tax lawyers, like the team at The Quinn Group, who are experts in taxation. They use their knowledge and experience to ensure that you not only meet your obligations, but also legally minimise the amount of tax that you are liable to pay.
Call us on 1300 (QUINNS) or + 61 2 9223 9166 or submit an online enquiry today and schedule a meeting or teleconference to discuss your individual situation and requirements when it comes to trustee resolutions, declaring dividends for Div. 7A loans or any other taxation matter.
