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A recent ATO publication highlights the importance of planning for year-end trust distributions. If, for instance, the trustee makes a resolution after 30 June, no beneficiary was presently entitled to trust's income by 30 June and there was no default clause in the trust deed, then the trustee will be assessed on the trust's taxable income at the highest marginal tax rate, plus the Medicare Levy.
The ATO's Resolutions Checklist assists trustees to comply with their obligations.Stephanie McLennan, Maddocks Lawyers
A trust deed for discretionary trusts will govern which persons qualify as beneficiaries, and how the trustee is to determine the trust's income for the relevant year. The trustee must then determine which specific beneficiaries will receive the trust's net income in what proportions. Generally speaking:
Therefore before a resolution is passed to determine who the eligible beneficiaries are, there is no one presently entitled to trust income. The exception is where the trust deed automatically distributes that trust income before 1 July, where the trustee has not made a determination.
It is essential that trustees check their trust deed and ensure they only make distributions to eligible beneficiaries.
A beneficiary refers to any person or entity for whose benefit a trust is to be administered and who is entitled to enforce the trustee's obligations to administer the trust according to its terms.
The Tax Determination 2012/22 provides useful examples of effective and ineffective resolutions.
Having considered who are the trust's eligible beneficiaries, the effect of a resolution is to determine which beneficiaries will receive distributions, and to determine what portion of trust income they will receive for that financial year. It is therefore important to determine that:
then the trust's net (taxable) income may be assessed to the default beneficiaries or to the trustee.
A default beneficiary will only be taxed if there is a clause in the trust deed which states that if no resolution is effectively made, then beneficiaries X and Y are automatically presently entitled to the trust income (possibly in combination with other beneficiaries). Those beneficiaries are then taxed accordingly.
If no resolution is passed by 30 June and no default clause exists, then the trustee will be taxed at the highest rate. In order to avoid this, please review the resolution checklist below.
The Resolutions Checklist divides tasks up in to two lists:
The Resolutions Checklist is extracted below.
For more information, contact Maddocks on (03) 9288 0555 and ask to speak to a member of the Commercial team.
Also, you can see Guides by Maddocks dealing with:
You can read earlier ClearLaw articles on a range of trust matters.
Leigh is a partner in the Maddocks Tax & Revenue team.
Leigh regularly provides advice on:
His advice covers both direct and indirect tax considerations.
Leigh advises Australian and multinational companies, high net worth individuals, accountants and financial advisers on all areas of taxation law.
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For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of their team.