Alert | Trust distributions must be resolved by 30 June. With less than 3 weeks to go, will you be ready?

13 June 2012

In prior years trustees had until 31 August to complete distribution resolutions for the year ended 30 June. In the wake of recent court decisions the Australian Taxation Office (ATO) has scrapped this concession. This year resolutions must be completed by 30 June, which is less than 14 business days time!

What could happen if the deadline is not met?

It is not good!

  • Purported distributions to beneficiaries / unit holders may be ineffective for tax purposes
  • The trustee may be taxed on the entire tax income of the trust at 46.5%
  • Penalties and interest (~11.5% p.a.) could be imposed on the trustee
  • Beneficiary / unit holder tax returns may be incorrect and require amendment
  • The trustee could be accused of mismanagement and breach of duties
  • Issues around the trustee's ability to claim indemnification under the trust deed
  • A default beneficiary may be treated as entitled to all trust income or more than was intended

Simply rolling forward what was done last year is risky

Prior year procedures may well be of limited value because:

  • they may be based on having final trust accounts which will not be available by 30 June
  • they may be drafted based on a post year end time frame.

An unprecedented period of change in trust tax law also means there are many traps for the unwary. Key changes include:

  • In the last few months the ATO has challenged the effectiveness of so called 'income equalisation clauses' in trust deeds. Such clauses equate trust income to tax income and are very common. Does your deed have one?
  • New streaming rules for franked distributions and capital gains have introduced new concepts and requirements that may not be appropriately addressed by existing trust deeds or past resolution precedents.
  • Landmark court decisions have been handed down on key aspects of the taxation of trusts including the meaning of trust income, present entitlement, ability to stream capital gains (including related discounts) and franking credits, resettlement, treatment of unit redemptions and fixed trust status (which in turn impacts capacity to carry forward trust losses).  The cases include Bamford, Colonial First State Investments Limited and Clark.
  • In April the ATO withdrew its 'Creation of a new trust - Statement of Principles' . This was a source of much needed guidance on the critical issue of trust resettlements.
  • The ATO has publicly challenged the presumption that gains on trust asset disposals are taxed under the capital gains tax rules and not as ordinary income.
  • New Tax File Number withholding rules for closely held trusts.
  • Changes to the 2012 trust tax return form to provide the ATO with greater detail on trust income and how it is shared amongst beneficiaries.
  • The roll out of the Managed Investment Trust regime.
  • A soon to be released public determination on the proportionate approach to trust taxation.
  • Ongoing review by Treasury of the taxation of trusts generally.

The ATO will be checking

Trustees are on notice that the ATO will closely scrutinise 30 June distribution resolutions and general trust compliance.

What should trustees and trust managers do?

If there was ever a time to review and update your distribution resolution process it is now!

We can help

Our tax team has played a leading role in trust tax reform including through appointment to an invitation only government advisory panel. We stand ready to assist with trust issues from the straightforward to the most complex. Importantly, we can advise rapidly to assist you in meeting the 30 June deadline.

Author(s) David Pratley