If you have a discretionary trust, then 30 June 2023 is a very important date for you! Trust distribution resolutions must be completed before this deadline. Failure to complete a trust distribution resolution prior to the end of the financial year (EOFY) could result in the trust paying tax at the top marginal rate (up to 47%). Continue reading for more information from our accountants.
What is a Discretionary Trust?
The purpose of a trust is to separate the legal and beneficial ownership of assets. The trustee has legal ownership and the beneficiaries benefit from the income that flows from these assets.
In Australia, a family trust (also known as a discretionary trust) is a type of trust where the trustee has the power to decide which beneficiaries will receive income or capital distributions and in what proportions. Unlike other trusts, beneficiaries don’t have a fixed entitlement to the trust’s income or capital and their right to receive distributions is at the discretion of the trustee.
Trusts are commonly used for tax planning and asset protection purposes. They can be used to distribute income in a tax-effective manner, as the trustee can choose to distribute income to beneficiaries who are on lower marginal tax rates. Discretionary trusts can also be used to protect assets from potential legal claims, as the assets of the trust are owned by the trustee and not by the beneficiaries. However, there are certain rules that apply to trusts and it’s essential to comply with them to avoid paying unnecessary taxes.
Understanding Trust Distribution Resolutions
Trust distribution resolutions are an important part of tax compliance for trusts, as they determine the amount of tax a trust will pay. These resolutions are decisions made by the trustee on the distribution of income and capital gains generated by the trust. This resolution must be made before the end of the financial year (30 June) and communicated to the beneficiaries of the trust.
Trust distribution resolutions are necessary because they determine the amount of tax that the trust will pay. If the trustee does not make a resolution before 30 June, the trust will be taxed at the highest marginal tax rate, which is currently 47%.
On the other hand, if the trustee makes a valid resolution before 30 June, the trust can distribute the income and capital gains to the beneficiaries, who will be taxed at their individual marginal tax rate. This can result in significant tax savings for the beneficiaries and the trust.
The laws surrounding the establishment and operation of discretionary trusts in Australia vary depending on the state or territory. To make sure that your discretionary trust is set up and managed properly, it’s important to seek professional advice that is tailored to your individual circumstances.
The trustee’s decisions are recorded in the distribution resolution for each income year, which needs to be carefully prepared to deal with things like:
- How trust law income is to be defined for this income year
- Whether the trustee will exercise discretion to determine trust law income on the same basis as taxable net income
- Whether the trustee will decide to stream specific categories of income like capital gains and franked distributions, and
- Whether a default beneficiary or balance beneficiary will be nominated to deal with any amounts not effectively distributed (such as if the trust is audited in future).
Completing Trust Distribution Resolutions Before EOFY
To make a valid trust distribution resolution, the trustee must follow specific rules:
- The resolution must be made in writing and dated before 30 June.
- The resolution must specify the amount and nature of income and capital gains to be distributed (this can be distributed in percentages rather than outright numbers).
- The resolution must be communicated to the beneficiaries of the trust.
- The resolution must be documented in the trust’s financial records.
- If the trustee does not comply with these rules, the resolution will not be valid and the trust will be taxed at the highest marginal tax rate (47% for the 30 June 2023 income year).
The ATO has also tightened the requirements around the distribution of income. They have announced they will be focusing on tax-effective distributions, where the trust distribution is not paid to the beneficiaries in cash. Specifically, they are focusing on distributions to adult children or related parties to the trust controllers, where that beneficiary distribution:
- Is to a tax-effective beneficiary (someone at a lower tax rate), and
- The trust distribution is not paid in cash to the beneficiary but is used for the benefit of someone else (i.e., kept in the Trust, distributed to other beneficiaries or controllers of the trust).
If the ATO determines that you have made the trust distribution solely for tax-effective purposes, they will deem the distribution to be invalid and the Trust will be assessed on the amount at the highest marginal tax. As a result, you may need to evaluate and change your trust distribution strategy to ensure your trust distributions do not fall foul of the ATO. Make sure to speak to your accountant as soon as possible if this is a concern you have.
Who Needs To Prepare Trust Distribution Resolutions?
The trustee of every discretionary trust MUST prepare a resolution every year, even if the trust has earned no income. Your accountant is also required by the ATO to prepare the 2023 Trust Tax Return in accordance with the resolution.
When Does The Trust Distribution Resolution Need To Be Prepared By?
Trust Distribution Resolutions need to be prepared and signed by 30 June 2023. If you have an accountant, they will be legally unable to assist you with the preparation of your 2023 resolution after 30 June 2023.
What If I Don’t Complete My Trust Distribution Resolution?
If a trustee fails to make a trust distribution resolution before 30 June, then no beneficiary will be considered presently entitled to the trust income. This would result in the trust being assessed on the income at the highest marginal tax rate, which is currently 47% for the income year ending 30 June 2023. Therefore, it’s important that you complete a trust distribution resolution before the end of the financial year to avoid this outcome.
How Can Our Accountants Help You?
For those with a discretionary trust, completing a trust distribution resolution before the end of the financial year is critical to avoid unnecessary tax implications.
Our accountants are well-informed regarding trust distribution resolutions and can provide expert advice and assistance to ensure that your trust is structured in the most tax-efficient way possible. If you would like us to attend to the completion of your 2023 trust resolution, please let us know as soon as possible. Please keep in mind that we are legally unable to help you with the preparation of your 2023 resolution after 30 June 2023.