Trust Distribution Resolutions - What you need to know before June 30

Trust Distribution Resolutions.
What you need to know before June 30

What is the relevance of accounting to tax? Or maybe a better way to frame this question is to consider whether what we do in the accounts, or as part of the entity’s broader compliance activities, will impact the tax outcome.

One area where a connection is clear is with respect to trust distributions. How a distribution resolution is worded directly impacts the tax liability. It is important not because it determines what is taxable but because it is the basis for determining where the tax liability falls.

Trust Distribution Minute
The net income of a trust is taxed in the hands of the beneficiaries (or the trustee on their behalf) based on their share of the trust's income (that is, the share they are 'presently entitled' to) regardless of when or whether the income is actually paid to them. The trustee must prepare a document known as the distribution minute to make the beneficiaries 'presently entitled' to the income as at 30 June and avoid the situation where the trustee is taxable, which is at the highest tax rate.

How SMART can assist with preparation of your Trust Distribution Minute

SMART Business Solutions can prepare your trust distribution minute on your behalf. If this service is not part of a tax planning service, the minute will be prepared based on the prior year distribution.

If your business has been growing, or you have experienced changes in the business or other personal & investment income, we strongly recommend you invest in our tax planning service which will enable us to give you proactive tax planning before June 30.

Whilst we always undertake tax optimisation when we complete your accounts, there will often be situations where we do not have the same strategic opportunities after June 30.

We are often asked questions on these distribution minutes, as below:

When do I have to make Trust Distribution 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).

What happens if I don't prepare a Trust Distribution minute?

If a valid trustee resolution distributing the trust’s income is not made by 30 June, any later resolution will be ineffective, giving rise to these unintended consequences:

Under the trust deed, the trust’s default beneficiary/ beneficiaries become ‘presently entitled’ to the income of the trust and are taxed on it — even if the income is not paid to them or it cannot be paid to them because the cash has already been distributed to other beneficiaries.
No beneficiary will be presently entitled to the income of the trust as at 30 June, resulting in the trustee being assessed on the income under section 99A at the top marginal tax rate.

Do I need to prepare a Trust Distribution every year?

Yes, this must be prepared every year based on the income for that year.

Can I prepare a Trust Distribution myself?

Absolutely, please prepare it, making the appropriate allocations to the beneficiaries, and provide a final signed version to our office so we can follow this during the tax return preparation. Please note, we cannot provide advice on the allocations or provide a template to complete the preparation yourself.

Does the ATO care?

Whilst the laws have not changed, a major tax case caused a complete shake-up in relation to trust distribution minutes.
Up until this tax case, accountants used to prepare these documents as part of the end of year accounts, deciding at that time how to distribute the trust funds.

Following on from this case the ATO made it clear that a trustee MUST decide before 30 June otherwise the minute was not valid.

The ATO states they have NOT changed the legislation, it had always been this way, and just not interpreted correctly. Each year the ATO does send out requests to trustees in July for their distribution minutes pre-June 30.

Questions?

We are happy to assist you in preparation of your Trust Distribution Resolution.

Contact our office to get the process started.

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Trust Distribution Resolutions - What you need to know before June 30