ATO Fires Warning Shot on Trust Distributions: Key Considerations When Distributing Trusts

The ATO has issued a warning, saying it is closely examining how trusts distribute income and to whom.

In recent years, there has been a great deal of attention around the distribution of income by trusts. Trustees must carefully evaluate trust distribution structures before designating or allocating revenue to beneficiaries.

What is stated in your trust deed?

The fact that trustees are not taking the trust deed into account prior to appointing income is concerning. The trust deed usually contains the answers to questions about what the trust can accomplish, who it can give money to, and how. This must be the first thing to consider.

Review your deed

• Examine the trust deed and any modifications to make that the trustees are acting in accordance with its provisions;
• Check the date of trust vesting. What occurs when the trust vests will be outlined in the trust deed. The trustees may be instructed to allocate the trust’s assets and income to specific beneficiaries in the event that the trust vests. It’s possible that the trustee will no longer be able to choose who gets income or capital;
• Verify the intended beneficiaries and bear in mind that, depending on the terms of the trust deed, some beneficiaries may be entitled to various amounts of capital and income;
• Timeline and resolution requirements: Verify the deed for any terms and specifications pertaining to trustee resolutions, such as the necessity of a written resolution and the deadline for its completion. For instance, the deed may stipulate what trustees must do by June 30;
• Verify that the trust deed does not prohibit you from streaming capital gains or franked distributions to specific beneficiaries, and that the streaming criteria have been satisfied.

Family trust and interposed entity elections

An election for a family trust aids in focusing the trust’s operations on a particular person’s family group. If these elections are used improperly, they can result in serious tax issues in addition to protecting trust losses, corporate losses, and franking credits.

An entity becomes a member of an individual’s family group through an interposed entity election.

Trustees must be aware of the ramifications before deciding how much to distribute when these elections are in place. Family trust distribution tax with penalty rates will be applied to distributions of trust income outside of the designated individual’s family group.

Who is the beneficiary?

The ATO is also searching for arrangements in which beneficiaries get amounts assigned to them or designated to them, but they do not actually profit financially from the distribution. The level of risk involved will typically grow and the ATO will become engaged if the arrangement has the impact of lowering the total tax paid on the trust’s revenue.

Increased reporting on tax returns

To better record the information about trust income distribution on the tax return, changes have been implemented. Among them are:

• Trust Tax Return: There are now four more capital gains tax labels on the trust tax return. Beneficiaries should receive this information in accordance with what is stated in their tax forms.
• Beneficiaries: A new trust income schedule must be filed for each beneficiary of trust income. The trust’s declaration of distribution should correspond with this schedule for your disbursements.

Trusts are a great tool for a variety of reasons, one of which is the ability to allocate money however you see fit. Strong controls and compliance come at a cost when you choose flexibility.

Concerning trust income distributions and their tax implications, the ATO is becoming more and more adamant. It is crucial for trustees to make the correct decision since there may be serious tax complications if trust disbursements are determined to be invalid.

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