There are many benefits to including a trust in your Group Structure, including asset protection and income streaming to lower income earners. There are however a few compliance hoops for trustees to jump through, here's the top 8 items trustees need to be aware of and comply with prior to June 30.
There are many benefits to including a trust in your Group Structure, including asset protection and income streaming to lower income earners. There are however a few compliance hoops for trustees to jump through each year and these do change from time to time with legislation reviews. We have summarised 8 key items trustees need to be aware of and comply with prior to June 30.
1. Trust Distributions must be determined and documented by 30 June to give an effective "present entitlement" of trust income. In order to optimise the tax benefits from trusts, the income for the current financial year will need to be estimated and the tax position of the various beneficiaries will need to be considered to determine optimal distribution. Careful wording of the trust resolution is critical.
2. ATO may request copies of trust distribution minutes. The ATO has flagged that they will be asking some trustees to submit minutes for review. Until now an ATO review of minutes has only been necessary where the trust affairs were being audited. It is important that all minutes are put in place by June 30 and retained on file.
3. Beneficiaries to provide tax file numbers: New TFN rules introduced in recent years now require the trustee to ensure that the tax file numbers (TFNs) for beneficiaries are recorded prior to making the distribution. If no TFN is held at the time, the trustee is required to withhold tax from the distribution at the rate of 46.5% for distributions made by 30 June 2014. The trustee is also required to report the withholding amount and pay it to the ATO. The TFNs of beneficiaries must also be reported to the ATO 28 days after the end of the quarter in which the TFN is advised to the trustee. TFNs reported on the recent tax returns will not need to be reported again, however new beneficiaries or beneficiaries who have recently received a TFN will need to be disclosed to the ATO by 28 July. As these TFN reports cannot be backdated, it is essential to list all possible beneficiaries at the time of making the resolution in June, and to record their tax file numbers.
4. Distributions to charities need to be paid or notified. This requirement was introduced in the 2011 financial year and continues to apply. A trustee making a distribution to a charity needs to pay the amount to the charity during the financial year, or no later than two months after the end of the financial year. Alternatively, the amount of the distribution needs to be advised to the charity (preferably in writing) no later than two months after the end of the financial year.
5. Streaming of capital gains and imputation credits is possible. The legislation introduced in 2011 to allow streaming of capital gains and imputation credits continues to apply this year. This legislation allows for streaming of income if the trust deed allows for it, and if the distribution has been made effectively by the trustee. This allows streaming of a capital gain to a person who can make the most of the gain, for example someone with capital losses available. Similarly, dividends carrying imputation credits can be streamed to beneficiaries who can take the best advantage of the imputation credits and away from those who can't. Note however that the capital gain or franked dividend paid to a beneficiary must be in proportion to the economic benefit received by that beneficiary; that is the law prevents artificially distributing taxable income to a beneficiary if another party gets the benefit of that income.
6. Distributions to minors are restricted. From 2012, the low income rebate no longer applies to minors receiving trust income. As a result, the effective tax free amount for minors is only $416.
7. Distributions to companies. Distributions to companies after 30 June 2009 continue to be subject to the "Division 7A" rules if funds are not paid to the company equal to the distribution amount. Where a distribution results in an amount payable from the trust to the company, the ATO's view is that this unpaid amount becomes a loan from the company. As private company loans fall under the Division 7A rules, there is a risk that the loan will become a deemed dividend, resulting in tax to the shareholders of the company. The Division 7A rules have a broad application and are complex. Distributions to companies should only be made as part of a planned strategy, review our Paying Dividends article for further information. This strategy may involve payment of the loan over 7 years as part of a formal loan agreement, or planning to pay the distribution in full prior to lodging the tax return.
8. Definition of income. The ATO has issued a draft ruling on what constitutes ordinary "income" of a trust. As the law stands taxable income must be distributed in proportion to ordinary income, so the ATO's proposed definition will have implications for how beneficiaries are taxed. The proposed definition will take away a trustee's flexibility to change how income is defined. As a result, some of the current flexibility to increase or decrease trust income will be lost. This will have implications for trusts that have recorded a loss for the year, or where there are significant differences between taxable and accounting income.
Should you have any queries about these items as they pertain to your Trust, please contact your usual Hanrick Curran Adviser or call Matthew Beasley on 07 3218 3900.