Year end obligations and documentation requirements
In Australia a common type of trust is a Discretionary Trust. A Discretionary Trust is a trust that is set up to allow the Trustee (i.e. the controller of the trust) to distribute trust net income/profits to different beneficiaries depending on the income type and which beneficiaries are eligible in the trust deed. A common type of discretionary trust is a Family Trust.
A key obligation concerning Discretionary Trusts, including Family Trusts is to understand what the net income from an accounting and tax perspective (as they can be different) will be for a given financial year and ensure that a documented decision is made by 30 June of that financial year (i.e. not in the year after) who that income is going to be distributed to and what type of income will be provided to them. The failure to make and document the decision via a minutes of meeting and distribution declaration and distribute the profit in an appropriate manner can result in the ATO deeming any net income as an undistributed or unpaid present entitlement and the trustee being taxed at the top rate of marginal tax, currently 47%.
As a rule, where net taxable and/or accounting income is likely to exist in the trust in that income year, the ATO requires that distribution minutes be prepared by 30 June of any given income year for that year. The distribution minutes have no fixed approach but generally involve covering the following:
- who the trustee would like to distribute the funds to (and whether they are eligible under the trust deed);
- what type of net income and associated benefits you’d like to distribute to those eligible beneficiaries (e.g. whether on trading account or capital gain) and what tax credits or benefits (such as franking credits) are attached to those items; and
- How much, or what percentage of those items you are to distribute to those individuals (or companies where appropriate).
Also, depending on the complexity of the Trust’s activities during the year, prior to preparing the distribution minutes and having the relevant meeting, it will be important to get an idea of:
1. the expected net accounting and taxable income of the trust and what types of income activities it incurred during the year; and
2. the expected income of any eligible beneficiaries and whether it would be appropriate to distribute any trust net income to them (and if so, how much).
Even if losses are expected in the trust, it is important to conduct this exercise to ensure that everything has been considered, the methodology documented, and the income distributed in an appropriate manner to ensure trustee obligations are discharged appropriately (as even if you determine to distribute the funds, the incorrect distribution of those funds can still result in unpaid present entitlements and tax payable by the trustee).
Accordingly, while the above is intended as a general overview of a complex area and does not consider one’s personal circumstances, it is important that trustees of discretionary trusts take the time to consider the above, make an appropriate decision, document it, and act on it by 30 June of the income year in question. If you are concerned about the above, please contact this office on (02) 9707 4470 and talk to your Simaco Manager today to ensure you meet your obligations on time and they are documented and acted upon correctly.