The ground rules for Trusts have changed
Recent announcements by the ATO on changes to trusts have the potential to catch out some trustees who might not be aware of how these changes impact them. In some instances, these changes take effect for the 2011/2012 reporting year and require action prior to 30 June.
Timing of Resolutions effecting Trust Distributions
Changes in ATO administrative practice has highlighted that the ATO will require trustees to determine all distributions for the current year by 30 June 2012. Previously, the ATO has allowed such determinations to occur up to 2 months after the end of the trust’s income year.
In the event that trustees are unable to prove the relevant distributions have been determined by 30 June 2012, the ATO could argue that no beneficiaries were presently entitled to the trust income for that year. In this event, the trustee could be assessed at the tax rate of 46.5%.
Unpaid Distributions to Corporate Entities
A revised ATO ruling has confirmed that trust distributions to corporate entities which remain unpaid will be considered by the ATO to be non commercial loans.
Non Commercial loans of this nature generally result in the distribution being treated as an unfranked dividend paid by the corporate beneficiary to the trust.
It is possible to take a range of remedial actions to prevent these loans resulting in deemed dividends. However, the remedial action generally requires the payment of interest each year together with payment of the distribution amount to the company at the end of a 7 to 10 year term. In making any decisions to distribute to corporate entities, trustees should consider the potential cash flow constraints arising from the requirement to make these payments.
Streaming of Capital Gains and/or Franked Distributions
Changes to legislation governing the taxation of trusts is relevant to trusts that:
a) have derived capital gains and/or franked distributions in the current year; and
b) seek to distribute the capital gains or franked distributions to specific beneficiaries in different proportions to the other income classes of the trust.
The new legislation governing the taxation of trusts imposes additional administrative requirements in order to stream income classes in this way. In the event that these requirements are not satisfied, each class of income will be treated as though distributed in proportion to the total trust distribution received by each beneficiary. This may affect access to the 50% discount on any capital gains or the ability to access franking credits on franked distributions.
In order to effect the distribution of specific classes of income it is generally necessary that the trustees ensure the records of the trust record the any beneficiary’s specific entitlement to these classes of income by 30 June 2012.
Review of Trust Deeds
Given the significant changes to trust legislation and its interpretation it is an opportune time to review the terms of a trust’s deed, particularly in the case of older deeds or where the trust has/will derive capital gains or franked distributions. The key issues that should be considered as part of the review include clarifying the trust’s definition of income and considering whether the deed contains the appropriate clauses to allow the streaming of income as discussed above.
As we head towards another financial year end, it is timely to focus on trusts, and the new rules affecting them, to make sure that your trust deed is up to scratch and can do what you want it to do.
BDO can assist with the review process. Contact one of our Private Clients Partners.
Disclaimer: This content has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. This content cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained herein without obtaining specific professional advice.