The ATO’s 100A guidance has changed the game, says HLB Mann Judd.
‘Tread carefully’ on trust distributions during EOFY
Recent rulings on trust distributions have complicated how they operate and accountants needed to be vigilant, said HLB Mann Judd Sydney tax director Peter Bardos.
“It’s important that trustees actively review their trust structure, including the distribution of income,” he said.
“Make sure there is a complete original copy of the trust deed, including any amendments.
“You will also need to ensure any resolution made to distribute the income from the trust or the capital is consistent with the terms of the deed.”
Mr Bardos said the simplest way to look at trust distributions was to understand the process was about working out who received what, and when, from the trust.
“Generally, discretionary trusts are required to prepare and execute distribution minutes prior to 30 June for each financial year,” he said.
“This is to explain in detail how the income of the trust will be distributed to beneficiaries for the relevant financial year and must detail any use of income streaming.
“These minutes must be prepared in accordance with the trust deeds. Failure to do these resolutions by 30 June will usually not result in the best outcome.”
Mr Bardos said trustees should also be considering the ATO’s section 100A draft guidance when preparing the year-end minutes.
“It’s now recommended the trustee document the intention of the funds and how this interacts with the draft guidance,” he said.
He said the ATO’s draft guidance on trust reimbursement arrangements outlined their views on when section 100A may apply.
Broadly, it would apply where someone other than the beneficiary enjoyed the benefit of trust funds appointed to a lower-taxed beneficiary. If applied, the income was taxed at the top tax rate.
Mr Bardos said it had previously been common practice to appoint income to a family member with a lower tax rate and leave those funds in the trust, for the benefit of all beneficiaries.
“This may still be in-line with the draft guidance however the minutes should be supplemented by a document with the intention for distribution,” he said.
“Trust vehicles are effective tax structures, but importantly, trustees shouldn’t leave it too late to review the guidance and make decisions, otherwise they risk greater scrutiny from the ATO.”
HLB Mann Judd wealth management partner, Michael Hutton, echoed Mr Bardos’ sentiment that investors shouldn’t leave EOFY planning too late.
Mr Hutton said ongoing market uncertainty only heightened the need for a clear, long-term investment strategy.
“The right tax structures, such as trusts, are important, but so too is an investment portfolio that’s diversified and has the appropriate exposure to a broad range of asset classes,” he said.
“There are a number of external macro factors rattling investment markets; Russia/Ukraine, rising inflation and rate pressures, and the change in Federal Government, however knee-jerk reactions to these will only hurt portfolios in the longer-term.
“Quality investments and appropriate asset allocation will win through for long-term portfolios and ultimately, ensure a comfortable retirement.
“Having a well thought through investment strategy can only help mute the noise.”