One of the superstar accountants at Cloud 8 recently consulted with a business owner who has come to us for second opinion. The business operates under a Family Trust (also refers to Discretionary Trust) structure and has been audited by the ATO for the 2016/2017 income tax. Upon the request by the ATO, the trustee failed to provide evidence that a resolution had been made to distribute the 2017 income to the beneficiaries of the trust. Consequently, the ATO concluded that no beneficiary was presently entitled to the income of the trust as at 30 June 2017, resulting the trustee being assessed on the income at the top marginal tax rate (45%).
Interestingly, it has been nearly nine years since ATO changed its compliance approach, effect from 1 Sep 2011, to ensure that trustee resolutions are made by 30 June, yet there are trustees completely unaware of this change.
Tips! Trustees who distribute income of a Family Trust to beneficiaries should sign a resolution by 30 June (or at an earlier date as required by the Trust Deed) for the distributions to be effective in determining how to tax effectively distribute the Trust income.
WARNING! If a valid trustee resolution is not made by 30 June, any later resolution will be ineffective, giving rise to these unintended consequences:
- Under the trust deed, the trust’s default beneficiary/ beneficiaries become ‘presently entitled’ to the income of the trust and are taxed on it.
- No beneficiary will be presently entitled to the income of the trust as at 30 June, resulting in the trustee being assessed on the income under section 99A at the top marginal tax rate.
What do you need to do to avoid paying extra tax if you have a Family Trust?
- Review the Trust Deed, including income definition, distribution clauses and beneficiaries
- Review the Trust Deed for any specific reference to include Franked Dividends and Capital Gains
- Determine the types of income of the Trust
- Estimate the amount of income of the Trust
- Prepare an effective Trust Resolution before 30 June.
Cloud 8 Recommendations and Solutions
Firstly, we walk through trust formation step by step with you and engage with top Australian law firms to draft modern Trust Deed in a ‘plain English’ style to ensure you understand your private Trust Deed.
Secondly, we are partnered with Xero to deliver a beautiful cloud-based accounting solution to you. The cloud 8 team provides great value as you can be comfortably making informed decisions, knowing your financial records are always up to date.
Thirdly, we advise you proactively well before 30 June for sufficient time to implement tax saving strategies.
Contact Cloud 8 Today for an obligation free appointment! The sooner we get started; the sooner we can help you save tax.