The ATO has warned that it is looking closely at how trusts distribute income and to who. Find out how to avoid penalties this EOFY.

The distribution of income by trusts has faced intense scrutiny in recent years. Trustees must carefully consider trust distribution arrangements before appointing or distributing income to beneficiaries.

What does your trust deed say? A primary concern is that trustees may overlook the trust deed when appointing income. The answers to what the trust can do, who it can allocate income to, and how, are usually in the trust deed, which should be the first reference point.

Review your deed:

  • Conduct a comprehensive review: Ensure all decisions align with the trust deed and any amendments.
  • Check the vesting date: The trust deed will detail actions upon vesting. If the trust vests, trustees may be directed to distribute income and property to specific beneficiaries, limiting their discretion.
  • Identify intended beneficiaries: Understand who the beneficiaries are and their entitlements under the trust deed.
  • Timing and requirements for resolutions: Verify conditions and requirements for trustee resolutions, including the necessity for written resolutions and specific timing, such as actions required before 30 June.
  • Stream capital gains or franked distributions: Ensure the trust deed permits streaming and that all requirements are met.

Family trust and interposed entity elections:

  • Family trust election: This ties the trust’s operations to a specific individual’s family group, protecting losses and franking credits but potentially causing tax issues if misused.
  • Interposed entity election: This integrates an entity into an individual’s family group. Trustees must understand the implications, as distributing trust income outside the specified family group triggers family trust distribution tax at penalty rates.

Who receives the benefit?

The ATO scrutinizes arrangements where beneficiaries are allocated income without receiving the actual financial benefit. If such arrangements reduce the overall tax paid, it increases risk and attracts ATO attention.

Increased reporting on tax returns: Recent changes require more detailed reporting on tax returns regarding trust income distribution:

  • Trust tax return: Four new capital gains tax labels have been added. This information must be provided to beneficiaries to match their returns.
  • Beneficiary reporting: All beneficiaries of trust income must lodge a new trust income schedule, which should align with the trust’s statement of distribution.

Trusts offer excellent flexibility in income distribution, but this comes with the need for strong controls and compliance. The ATO’s increased scrutiny on trust distributions and their tax implications makes it crucial for trustees to ensure validity, as invalid distributions can have significant tax consequences.


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