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Australian Taxation Office (ATO) 'ups the ante' on Trust Compliance

Take action Before 30 June to ensure you comply!

The last two years has seen a lot of change with the taxation of trusts – and we're only part way, as there are more trust reforms expected over the next few years.

This year, the ATO has released a controversial draft ruling on its views on what forms the 'income of the trust estate', making tax planning more difficult. The professional bodies have called for the withdrawal of the draft ruling due to its confusing nature and the fact that some statements are not supported at law.

Of possibly more concern is the increased level of compliance demanded of trustees. The ATO has indicated it will be taking active compliance action (i.e. reviewing trustee resolutions) in relation to certain trust distributions. This means trustees need to act now to ensure they are fulfilling their obligations.

Make a resolution by 30 June 2012 to distribute income to avoid the trustee paying 46.5% tax on the net income of the trust.

One thing that is for certain is that trustees need to resolve on or before 30 June how they will distribute the income of the trust for the year. If they fail to do so, in some cases, the trustee will be assessed on the net income of the trust at the top marginal tax rate.

Previously the ATO had provided an 'administrative concession' to allow resolutions to be made up to 2 months after the end of the financial year. This concession was not valid at law and has now been withdrawn.

The ATO has confirmed that while some trust deeds do not require the resolution to be in writing, it would be prudent to record it in writing (at least in note form) on the date of the resolution to evidence the decision. Formal trustee minutes can be recorded at a later date. As the ATO has advised it will be taking compliance action in relation to certain trust distributions, we strongly recommend all trustees make and record the resolution in writing before 30 June.

If the trustee wishes to 'stream' capital gains or franked dividends to particular beneficiaries, this must first be allowed by the trust deed, recorded in writing (by certain dates) and disclosed correctly.

How to make an effective trust resolution:

  • Understand what the trust deed says:
    • How is income defined?
    • How is capital defined?
    • Does the trust deed allow 'streaming' of distributions?
    • Who are the potential beneficiaries?
  • What is the estimated income of the trust?
  • Who do you wish to distribute income to (consider beneficiary level of income for tax effective distributions)?
  • Do you want to 'stream' franked dividends or capital gains to certain beneficiaries?
  • Ask Hanrick Curran for assistance to correctly make a tax effective resolution.

Failure to make an effective resolution may be as detrimental as making no resolution at all.

In addition to the ATO taking active compliance action in relation to certain trustees, it also requires all trustees to make more disclosures. There are potentially steep penalties for non compliance. Some of these disclosures are required to be made at an earlier date than the tax return.

  • A Trustee Beneficiary (TB) Statement is required in some circumstances if the trust is distributing to other trusts. The Trustee will be liable for tax at 46.5% if this is done incorrectly or not at all.
  • A TFN Report is required if a new beneficiary provides the trustee with their Tax File Number (TFN). Penalties apply for not reporting TFN disclosure correctly.
  • Withholding tax is required if no TFN has previously been provided (subject to exceptions).
  • The trust tax return now also requires disclosure of each beneficiary's share of income of the trust estate and separately their share of franked dividends, capital gains and other income.

Speak now to your Hanrick Curran representative for assistance, to ensure that you comply with all the new disclosure requirements and avoid any penalties and/or non-disclosure tax.

Increased Risk of Tax Audit?

The new level of information disclosure will provide the ATO with more information about your trust, potentially leading to a higher risk of an audit. Have you considered tax audit insurance? Ausure South East Queensland can provide cost effective tax audit insurance to cover you for any professional costs associated with a revenue office review, potentially saving you thousands. Contact Nathan Case at Ausure on 07 3218 3966 or Nathan.case@ausure.com.au or speak to your Hanrick Curran representative for a referral.

The information provided above is only general in nature and should not be relied upon without seeking professional advice in respect of your own circumstances. However, the 30 June deadline is fast approaching so we recommend you contact your Hanrick Curran representative immediately to ensure you comply with the new trust tax rules and disclosure requirements.