The ATO has issued a warning regarding its intensified scrutiny of how trusts distribute income and to whom. Discover essential tips to avoid penalties this financial year-end.
The allocation of income by trusts has come under close examination recently. Trustees must meticulously assess trust distribution arrangements before assigning or distributing income to beneficiaries.
What does your trust deed stipulate? An essential concern is the potential oversight of the trust deed during income allocation. The trust deed typically outlines the trust's capabilities, eligible beneficiaries, and procedures, serving as the primary point of reference.
Review your trust deed:
Conduct a thorough review: Ensure all decisions align with the trust deed and any subsequent amendments.
Confirm the vesting date: The trust deed specifies actions upon vesting. These differ from state to state. If vested (expired), trustees may be obligated to distribute income and assets to specific beneficiaries, limiting their discretion.
Identify intended beneficiaries: Understand the beneficiaries and their entitlements as outlined in the trust deed.
Timing and resolution requirements: Verify conditions and procedures for trustee resolutions, including the necessity for written resolutions and specific deadlines, such as actions required before June 30th.
Stream capital gains or franked distributions: Ensure the trust deed allows for streaming and that all conditions are met.
Family trust and interposed entity elections:
Family trust election: Links the trust's operations to a specific individual's family group, safeguarding losses and franking credits but potentially causing tax complications if money is distributed outside the family group as defined.
Interposed entity election: Integrates an entity into an individual's family group. Trustees must grasp the implications, as distributing trust income outside the designated family group triggers family trust distribution tax at penalty rates.
Who reaps the rewards?
The ATO scrutinises arrangements where income beneficiaries do not receive the actual financial benefits allocated to them. Such setups, aimed at reducing overall tax liabilities, heighten risk and attract ATO scrutiny. Beware of the dangers of S100A.
Enhanced reporting on tax returns: Recent changes mandate more detailed reporting on trust income distribution:
Trust tax return: Four additional capital gains tax labels have been introduced. Beneficiaries must receive this information to align their returns.
Beneficiary reporting: All recipients of trust income must submit a new trust income schedule, consistent with the trust's distribution statement.
Trusts provide substantial flexibility in income distribution but necessitate robust controls and adherence to regulations. Given the ATO's heightened focus on trust distributions and their tax implications, trustees must ensure accuracy, as improper distributions can lead to significant tax repercussions.
To find out more about this or any other area of Australian taxation law, please book a consultation with one of our taxation experts.
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