What do you normally do on a Saturday? Take the children to sport? Catch up on work? Get ready to watch the football? Or do you sit around the breakfast table deciding on trust income distributions? Yes- you read that last sentence right: on Saturday, 30 June 2012 you need to ensure you have done your trust distribution resolution.
As we approach the end of the 2012 financial year, the Australian Taxation Office (ATO) has signalled that trust distributions will be in the firing line.
Last year we successfully prepared all client trust resolutions prior to 30 June and we need your help to do it again this year.
Many accountants still think it is acceptable to prepare distribution resolutions at the same time as preparing the financial statements and tax returns (i.e. post 30 June). However this is not the case. Without a resolution prepared by 30 June your trust deed will determine who receives trust income and it is most likely your trustee who pays tax at 46.5% - The worst possible tax outcome!
In a new development, the ATO has flagged that they will be asking some trustees to submit resolutions for review by them within the first week of July. Until now, an ATO review of resolutions has only been necessary where the trust affairs were being audited. It is therefore important to ensure that all resolutions are put in place by 30 June and retained on file.
In 2012 it will be necessary for the trustee to ensure that the tax file numbers (TFN) for beneficiaries are recorded prior to making the distribution. If no TFN is held, the trustee is required to withhold tax from the distribution at the rate of 46.5%. The trustee is also required to report the withholding amount and pay it to the ATO.
TFNs reported on the 2011 tax return will not need to be reported again, however new beneficiaries or beneficiaries who have recently received a TFN will need to be disclosed to the ATO by 31 July.
The effect of these changes will be to force the trustee to make a reasonably accurate forecast of the income and to decide, before 30 June, who will receive the distribution for the year.
Your harris black team member can help you with these new provisions.
The legislation introduced in 2011, to allow streaming of capital gains and imputation credits, continues to apply this year. This legislation allows for streaming of income if the trust deed allows for it, and if the distribution has been made effectively by the trustee by the 30th June.
The streaming provisions allow for a capital gain to be distributed to a person who can make the most of the gain, for example someone with capital losses available.
Similarly, dividends carrying imputation credits can be streamed to beneficiaries who can take the best advantage of the imputation credits, and away from those who can't.
It is important that your harris black team member is on hand to ensure your resolution is prepared correctly.
In the 2011 budget; the government announced that the $1,500 low income rebate would no longer apply to minors receiving trust income. As a result, the effective tax free amount for minors will reduce from $3,333 to a meagre $416. It may now be commercially unviable to make a distribution to children that are under 18 years old.
Please note if your child (who is under 18) has a legal disability you may be able to distribute to them and have the benefits of the adult tax rates. Please contact your harris black team member if you think this applies to you and your family.
By distributing to a corporate beneficiary you can limit tax to the company tax rate of 30%.
However, due to the complexities of Division 7A, distributions to companies should only be made as part of a planned strategy.
This strategy may involve payment of the loan amount over 7 years as part of a formal loan agreement, or planning to pay the distribution in full, prior to lodging the tax return.
This requirement was introduced in the 2011 financial year and continues to apply. A trustee making a distribution to a charity needs to either pay the amount to the charity during the financial year, or no later than two months after the end of the financial year. Alternatively, the amount of the distribution needs to be advised to the charity by two months after the end of the financial year.
The advice to the charity needs to be in writing and we would recommend that a written acknowledgement of the amount advised, be obtained from the charity.
The ATO is yet to release legislation on many issues regarding trusts. We at harris black are continually monitoring all developments and best practice recommendations.
Due to the current uncertainty we are holding off on any recommendations to amend trust deeds (except in exceptional circumstances) until more clarity is provided.
We will inform you if and when we think an update is required.
Whilst this all seems very difficult the benefits of trust still exist.
Your Harris Black team member is well equipped to help you comply with these administrative requirements and help you understand the technicalities of running a family trust.
Please contact your harris black team member to ensure your trust resolution is made prior to 30 June 2012.
Published 28 June 2012