Historically, part of the year end accounting process for trusts has included formalising 30 June trust distribution resolutions.
Following a recent Federal Court decision, the ATO has toughened its stance as to the timing and recording of trust distribution resolutions. Whilst the ATO has traditionally had a somewhat relaxed attitude to this issue (with administrative rulings that permitted resolutions to be made within two months of the end of the year of income, being 31 August for most trusts), these rulings have been withdrawn, which impacts on the 2012 year (and subsequent years) of income. In addition, the ATO has flagged that it will be active in this area and may contact trustees seeking evidence that distribution resolutions have been made within the required time frame.
It is critical that taxpayers using trust structures respond appropriately in relation to the timing and documentation of distribution resolutions for the 2012 year of income. Whilst the timing and degree of formality required may vary from trust to trust (as the terms of each trust deed will vary), almost invariably, there will be some action required of trustees by 30 June.
What actually needs to be done by 30 June?
The first relevant factor is to ensure that the terms of the trust deed pertaining to trust distributions are adhered to. For a valid trust distribution to be made, trust deeds may require written determinations to be made by the trustee by 30 June, they may be silent as to the degree of formality required, or they may even require a resolution be made by a date earlier than 30 June. However, many trust deeds are silent as to the requirement for a written distribution resolution. In these circumstances, the ATO may nonetheless request evidence to support the fact that the resolution was in fact made by the required date.
For trusts with a corporate trustee that has multiple directors, a meeting should be held by the earlier of the date required under the trust deed or 30 June. For single director companies, from an evidentiary perspective, it may be best for the single director to meet with or discuss the resolution with another party, such as the external accountant of the trust, which can also be recorded as a formal resolution subsequently.
As to what is physically required to be recorded in writing by 30 June, again, the first reference should be to the requirements of the trust deed itself. If the trust deed does not specify any requirement to prepare a written record of the resolution by a certain date, the following should be borne in mind:
- some contemporaneous written evidence is required by law to be prepared by 30 June, if the relevant trustee is wishing to stream franked dividends to specific beneficiaries; and
- otherwise, the ATO has stated that it only requires evidence that the trustees have made the appropriate distribution resolution by the required date (end of the year of income) in order that present entitlement exists. Whether there is an express requirement under the deed for a written resolution or not, clearly a written resolution is strongly recommended, to document the distributions resolved by the trustee.
Whilst a formal signed distribution minute is not required to be signed in either circumstance as at the end of the year of income (it can be signed after 30 June, being reflective of the earlier resolution), some form of documentary evidence as at the end of the year of income is mandatory in the case of streaming of franked dividends, and strongly recommended more generally. This documentary evidence might include a file note or diary record of the meeting or a distribution map that evidences the resolutions made.
Importantly, this will establish a present entitlement to income or capital of the trust to the various beneficiaries. Another important point to note is that for trustees wishing to stream capital gains of a particular income year to specific beneficiaries, written evidence is required to be prepared no later than 31 August.
What does the trustee resolution need to say?
Key issues to consider in framing a distribution resolution include:
- ensuring that the resolution is expressed on a basis that is consistent with the provisions of the trust deed;
- expressing the resolution on a basis that is sufficiently certain to be valid, which is particularly relevant for discretionary trusts – distributions may be expressed by way of:
- dollar amounts to certain beneficiaries, with a residual amount to be allocated to another beneficiary; or
- by way of a formula or methodology that is sufficiently certain as to be capable of quantification (the quantification may take place after 30 June once financial accounts are prepared). This may be expressed by way of percentages or some other methodology; and
- of course, that the resolution achieves the desired commercial, family and tax outcomes.
The formalisation and execution of the resolution can still be dealt with as part of the year end process.
Trustees should therefore contact their accountant prior to 30th June to ensure they have adequately met their requirements and will not be subject to any adverse tax consequences.
What happens where action is not taken by the required time?
If the ATO considers that inadequate steps were taken by the required date, there is a risk that the ATO may determine that the entire taxable income of the trust will be taxed at 46.5%.
This is because, if no beneficiary is presently entitled to the trust income, the trustee will be assessed at the top marginal rate. Alternatively, some trust deeds may include a default beneficiary, who would be taxed on the trust income in this situation, even if this income has not, in fact, been distributed to them.
Therefore, it becomes imperative that trustees consider their resolutions in the coming weeks.
Do you need assistance?
Many trustees may need assistance with formulating and documenting trustee distribution resolutions. This is typically a task that external accountants have played a significant role with. Should you have any questions as to what may be required or require any further assistance, you should contact your Moore Stephens adviser immediately.
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